Australia | Jul 10 2006
By Chris Shaw
Stocks such as WorleyParsons (WOR) and Bradken (BKN) have shown servicing the mining sector can be a very lucrative operation, so upcoming listing Emeco Holdings (EMC) is attempting to cash in on the same market with what will possibly be the largest float on the ASX this year.
The company is offering shares at a range of $2.10-$2.50, with the issue expected to gross proceeds of between $1,005m and $1,127m assuming the final price is fixed within that range.
The company is a supplier of heavy earthmoving equipment in Australia and overseas markets such as Canada and Indonesia, renting out the equipment while at the same time providing additional services such as sales, parts and maintenance. Currently it rates number one in market share terms in its markets in Australia and Indonesia, though these markets remain very immature with only 15% inAustralia utilising rental equipment and just 3% in Indonesia. Despite this management is confident of further growth as the commodities cycle looks far from over, so demand is likely to continue to grow.
Working in the company’s favour is what it sees as significant barriers to entry into the market, not only because of the procurement network it already has in place but also thanks to its solid reputation and established customer relationships developed over its 34 years in operation.
In sectoral terms, the company operates primarily in the gold, coal and iron ore sectors in Australia; the oil, natural gas, oil sands infrastructure and civil construction sectors in Canada; and the coal and gold mining sectors in Indonesia. There are opportunities for expansion here too, management suggesting new markets such as the US offer potential, as does growing its civil construction work and building share in the aggregates markets.
The company’s growth history reads fairly well, with its pro-forma accounts showing capitalised annual growth rates for revenue and EBITDA between 2003 and 2005 of 24% and 26% respectively. Management expect such solid performance to continue, as the prospectus shows revenue is forecast to grow from $291.8m in 2005 to $381m this year and $525m in 2007, while EBITDA is estimated to increase from $96.4m to $142m and $207m over the same period. The prospectus forecast is for net profit in 2007 of $70.3m, with 35%-45% of earnings expected to be paid out via dividends.
As a number of leading brokers are joint lead managers to the issue and so cannot provide forecasts until after the stock has listed there are not many opinions in the market. Both Intersuisse and DJ Carmichael came out with an early view on the float and both advised investors not to subscribe to the issue.
In DJ Carmichael’s view the company is floating at an opportune time as it is in the middle of its earnings sweet spot, but the broker also believes it is simply being pitched at too high a multiple. On its estimates the stock will be priced on a P/E of between 17.5-19.8 times earnings in 2007, while the yield will also not be attractive enough to justify subscribing for shares.
There is some support for the broker’s view given the company is being sold by a private equity companies Archer Capital and Pacific Equity Partners, who between them hold 67% and will retain 10.4% of the listed vehicle. The current shareholders will receive about $680m of the float proceeds, which compares to their combined original investment in the company of $230m.
Intersuisse concurs with DJ Carmichael’s view and advises its clientele to have another look post the listing, preferably when the share price is close to $2.
The stock is expected to commence trading on the ASX on July 28th.