Small Caps | Aug 11 2020
Recent weakness in Emeco Holdings is detached from the long-term outlook for mining equipment rentals, although coal markets remain the key swing factor in FY21.
-Coal markets remain the driver of the stock
-Rental/contracting environment highly competitive
-Significant interest in proprietary EOS technology
By Eva Brocklehurst
Mining equipment rental has been solid and Emeco Holdings ((EHL)) has experienced limited impact from the pandemic in FY20. However, coal markets remain the key swing factor for FY21.
Eastern region earnings, heavily reliant on coal, are expected to be down -10-20%, while in the west new iron ore and gold projects should underpin growth forecasts of 15%. No formal guidance was provided at the FY20 results but Goldman Sachs calculates segment commentary implies operating earnings of $254m, which is -6% below its estimates.
The broker reiterates a Buy rating with a $1.30 target, asserting the company does note get the proper credit for diversifying over the last several years. Still, coal markets remain the driver.
Conditions have stabilised, following initial pandemic-related pricing concerns and some off-site requests being cancelled, and there has been a strong uptick in bidding activity. The broker expects further appreciation in the coal price over the next 12 months.
The company's Pit N Portal segment is performing strongly and Macquarie, with an Outperform rating and $1.40 target, also notes several growth opportunities exist amid a solid tender pipeline.
Goldman Sachs has been surprised by the underperformance of the stock but acknowledges there is very limited investor appetite for coal exposure. More outsized benefits should come from growing investor attention on under-appreciated aspects such as the growth that is ramping up in Western Australia. Management has noted strong demand for gold and iron ore work in FY21.
Morgans agrees recent softness in the stock is somewhat detached from the long-term value story, which appears intact. Noting the coal market weakness in the short term, the broker judges the rental/contracting environment remains highly competitive and this will weigh on rates.
The company believes the worst of customers deferring rentals has likely passed, but evidence of higher utilisation and earnings probably requires a turnaround of more than 12 months and, in Morgans' view, a more attractive window to the stock will emerge in 18 months.
Acknowledging an undemanding valuation, Moelis is mindful of the operating leverage which previously provided strong earnings growth but, as this works both ways, it could put pressure on earnings should subdued conditions prevail.
This is particularly the case given rental exposure to the east coast coal markets. The broker, therefore, retains a Hold rating with a $1.09 target until there is some improvement in these markets.
Workshop activity levels are likely to remain high for retail underground maintenance, Macquarie asserts, as well as additional boiler making and fabrication. Workshops provide the company with the critical components to keep its rental fleet operating and customers mining and, as the broker points out, this also allows the fleet to be re-built cost effectively.
Emeco now has 1000 staff following the acquisition of Pit N Portal, including operators, mechanics, boilermakers and engineers. The company plans to extend its reach into underground operations following this acquisition with significant interest cited in EOS technology.
This is the company's proprietary technology which measures fleet performance, dig rates and machine utilisation in real time and enables miners to improve productivity and remove costs.
Morgans takes a “contrarian Buy” view with a $1.66 target, believing the stock suits investors capable of incorporating sector dynamics that should improve sharply as steel-making capacity recovers outside of China. The main risk is a shock to demand/activity in the gold and iron ore markets.
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