Small Caps | Feb 10 2021
This story features EMECO HOLDINGS LIMITED. For more info SHARE ANALYSIS: EHL
Momentum is building for Emeco Holdings which, having dealt with its debt levels, is now looking forward to new projects as it expands its mining services business
-Flat rental outlook for the second half
-Margin dilution likely from increased mining services
-Yet earnings growth to remain strong in the west
By Eva Brocklehurst
Momentum in mining is slowly resuming for Emeco Holdings ((EHL)), with the company expecting FY22 will deliver earnings growth from new projects and expansion of the Pit N Portal business into mining services versus rental.
Conditions in coal throughout most of 2020 meant the eastern region of the company's business experienced limited tender prospects. New projects are expected to ramp up in the fourth quarter of FY21 and this will support management's expectations for growth in FY22.
Operating earnings of $118m in the half-year were at the top end of the guidance range provided at the AGM, amid strong cash flow and despite debt servicing. The outlook is somewhat weaker than brokers expected, although conditions are acknowledged to be improving.
Growth opportunities in the east coast are expected to come with underground maintenance, field service and fabrication as retail services are expanded. Morgans suspects the reaction in the share price to the results was misplaced, reflecting reported one-offs and the flat rental outlook in the second half.
On the "not so good" side Macquarie notes rental margins in the eastern region in the first half were weaker, stemming from lower utilisation and affected in turn by lower coal prices, Chinese trade restrictions and the pandemic.
Moelis assumes some margin dilution from the increased contribution from mining services contracts going forward yet highlights both thermal and metallurgical coal have improved as manufacturing and blast furnace utilisation are recovering globally.
The broker upgrades the stock to Buy with a $1.50 target, assessing operating leverage is working in Emeco Holdings' favour as coal prices rebound while the balance sheet has been de-risked.
Idled fleet could also be redeployed in the west, Macquarie points out, where earnings growth is expected to remain strong and margins improve in FY22 as single shifts are converted to double-shift projects. The redeployed fleet will attract additional costs but the broker suggests it will be in a better position in buoyant markets and will further diversify the exposure away from coal.
The company is diversifying via a focus on service revenue, which Macquarie notes is widening the customer value and attracting mid cap and small miners with longer tenure.
Morgans, sticking with an Add rating and a target of $1.32, observes the business is continuing to evolve and, while de-gearing in recent years has been frustrating, leverage can reduce further, to around 0.6x by the end of FY22.
Expansion will mean the business becomes more resilient through the cycle. The broker suggests the main risk is volatile metallurgical coal prices/volumes but the coal market should continue to stabilise throughout 2021.
Morgans assesses customer contract deferrals overshadowed 2020 but recovery is now entrenched and this will support a recovery in FY22 rental earnings. The broker adds, despite little change to China's import controls, "sheer logic/economics" should mean traditional market flows and prices resume over the next 12 months.
The lack of a definitive dividend policy may also have disappointed investors, given the improving capacity to pay. Macquarie, retaining an Outperform rating with a $1.30 target, notes Emeco Holdings expects to reconsider a dividend payment at the end of FY21.
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