Emeco Holdings Limited (ASX EHL) released its guidance for FY19, an operating update and investor presentation today. The EHL share price bounced nearly 17% to $1.93 on the back of the news.
The company expects FY19 operating EBITDA to rise nearly 40% year-on-year to the range of $211 million to $213 million, amidst positive market conditions and increasing material movement.
About Emeco Holdings Ltd
Emeco Holdings Ltd (ASX EHL) is a world leader in heavy earthmoving equipment. Founded in 1972, Emeco has operations in all key mining regions of Australia, and its customers include mining companies and contractors across coal, copper, bauxite and iron ore.
The company harnesses big data analytics and global benchmarking to help achieve optimal productivity from its equipment, and thereby customers’ operations.
It has close to 1000 machines in its rental fleet, supported by a network of maintenance and component rebuilding workshops across the country. The fleet is powered by its own proprietary asset management and fleet optimisation technology.
FY 19 operational update
The company expects its FY19 operating EBITDA to jump nearly 40% from FY18 levels to the range of $211 million to $213 million, it revealed in its investor presentation.
The company cited positive market conditions, increasing total material movement, and tight equipment supply conditions for robust guidance. It said the outlook for FY20 remains strong.
The company expects ROC to be approximately 20% in FY 19, the highest since its IPO, and from 13% in the previous cycle peak in FY 12. Higher rental rates and utilisation could boost ROC even further.
Emeco Holdings business and fleet insights
The company is able to drive stronger business returns because it is able to achieve reduced capital intensity and operating costs through machine life cycles. This is possible due to the extension of asset lives using asset management capabilities and the company’s internal Force workshops.
Compared to the industry average, the company’s fleet is younger, even though it has the policy to invest in midlife equipment to optimise the use of its capital.
The company is able to achieve equipment reliability and reduced costs through its engineering ability to rebuild components in-house. This results in a two-pronged benefit: lower equipment life-cycle costs and lower capital intensity, which earn a cost advantage versus competitors as well as a better return on assets.
This ensures that Emeco is a leader on the cost curve throughout an asset’s life-cycle, as seen below.
Emeco Holdings equipment rental scenario
The company is benefiting from a boom in equipment rental as mining companies, wary of the excesses in the period 2010 – 2013, have been hesitant to overinvest in fleet additions. Long equipment delivery times have exacerbated the situation now that miners are moving much higher material.
Emeco is using the good times to deleverage
The company is aggressively deleveraging its balance sheet and is on track to achieve 1.0X by FY21.
The company has already moved down from 5.5X in FY17 to a forecasted 2.1X in FY19.
That’s good going and will enable Emeco to reduce its financing costs by refinancing outstanding notes on cheaper terms.
“Dividends and share buybacks will be considered post-note refinance,” the company assured in its presentation.
At $1.93, the EHL share price is down substantially from its 52-week high of $2.8950.
At a PE ratio of 66.48 EHL is very expensive versus its sector peers.
However, given the company’s guidance, rental market conditions and successful deleveraging that may result in dividends and buyback, the outlook for the company is positive.
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