Emeco – Bargain Or Dog?

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This story features EMECO HOLDINGS LIMITED.
For more info SHARE ANALYSIS: EHL
The company is included in ALL-ORDS

By Chris Shaw

Averaging down on the purchase price of a stock is a tactic fraught with danger. It may pay off hansomely in the long run or the stock may simply be heading south for good reason. Which is the case for Emeco?

Certainly the entire Australian market has been under pressure of late but when a company gives specific reasons as to why it is struggling there is a time to walk away and Citi suggests yesterday’s earnings downgrade from heavy equipment rental group Emeco Holdings ((EHL)) represents that time for the stock.

Management advised earnings for the half year will now be around $30.5 million, having previously guided to earnings of closer to $36 million at its AGM in November. Reasons given include flooding at some of the mines where the company operates but in Citi’s view there is also an element of poor management about the downgrade.

As a result the broker has revised its rating on the stock to Sell, pointing out while the stock appears value given it is trading at around 7.7 times earnings for FY08 on revised full year guidance of $65-$72 million, the history of earnings disappointment means there is no reason to assume this number can be achieved with any certainty.

But given the broker had been expecting a full year result of around $77 million and market consensus had called for a number slightly north of $80 million both the broker and others in the market have cut estimates, Citi dropping its FY08 forecast by 15% to give an earnings per share (EPS) outcome of 10c against 12 c previously.

ABN Amro has been more aggressive with its cuts and lowered forecasts by 22% in FY08 to 10.7c for FY08 and by almost 30% in FY09, while JP Morgan has cut its FY08 EPS estimate to 10.8c.

Even larger changes to target prices have resulted, with UBS for example lowering its target to $0.75 from $1.40 previously, JP Morgan to $0.80 from $1.45 and Citi to $0.64 from $1.62 previously. The effect has been to reduce the average price target according to the FNArena database to $0.92 from $1.49 previously.

The impact on broker ratings has been somewhat more mixed though as while Citi takes the view enough is enough and has moved to a Sell and ABN Amro and UBS have downgraded to Hold from Buy, JP Morgan has gone the other way and upgraded to Overweight from Neutral on valuation grounds and suggests as the stock is now trading at a discount of around 10% to its net tangible asset (NTA) backing there is value on offer.

Credit Suisse agrees and retains its Outperform rating as with the stock in line with its NTA any earnings growth is effectively a free option at current levels. Even Citi allows for some investor interest if the share price falls any further, as it points out the company is in no danger of going broke so at some level value investors will find the share price attractive.

Overall the FNArena database shows three Buys, three Holds and the one Sell rating on the stock, which compares to five Buy ratings prior to the revised earnings guidance.

Shares in Emeco today are higher despite a weaker overall market and as at 11.20am were up 9c at $0.80. Management has reportedly hired UBS in case of predators wanting to make a move post this week’s sell-off.

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