Australia | Jun 08 2007
By Greg Peel
In the booming sectors of infrastructure and mining, with equipment in such heavy demand and so hard to find, you’d think an equipment hire company would just be rolling in it. But that hasn’t proven the case for Coates Hire (COA).
Like its little brothers Emeco (EHL) and Boom (BOL), Coates has been struggling, as manifested by another profit downgrade yesterday. The situation is that Coates is simply beset with problems on both the demand and supply sides.
On the demand side, mine shutdowns through either bad weather or other delays have proven a headache. Mines have been curbing production anyway, unable to ship out their product due to rail and port bottlenecks.
On the supply side, Coates is having trouble with delivery delays on new equipment. The manufacturers are pumping it out as quickly as possible, but there is heavy demand. A lot of that heavy demand comes from exactly the companies that Coates would otherwise hire equipment to. Awash with cash, why hire an old clunker when you can afford to buy the new model?
And such is the frustration. Hire companies with physical equipment have had to sit back and watch while their service provider counterparts such as Monadelphous (MND) and United Group (UGL) are simply raking it in. At its interim result, Coates set profit guidance at $106-110m but now has suggested the result could be up to 5% below the low end. This follows on from earlier disappointing results due to increased costs. Brokers have responded by lowering their own forecasts accordingly.
However, brokers had maintained faith, believing the share price sell-off was overdone. Ratings remained positive. But while yesterday’s announcement may have caused a change of heart under normal circumstances, last’s month news that private equity was sniffing around has now underscored those positive ratings.
While the share price has fallen from around $6.15 to as low as $5.80 over the last two days (admittedly in a weak market), the average of analysts target prices in the FNArena database has actually risen from $6.26 to $6.32. This is a result of Citi raising from $5.13 to $6.05 and ABN Amro from $5.40 to $6.20, and despite exuberant top marker UBS reining in from $7.50 to $7.05.
No one is talking about selling the stock, and as such the B/H/S ratio stands at 3/6/0. The question is whether private equity will maintain its interest, and analysts believe it will.