Higher Capex At Emeco Has Brokers Confident On Growth

This story features EMECO HOLDINGS LIMITED. For more info SHARE ANALYSIS: EHL

– Emeco's earnings update slightly disappointing
– Planned increase in capex an offsetting positive
– Brokers sees value given expectations of solid earnings growth

By Chris Shaw

Resource equipment hire group Emeco Holdings ((EHL)) plans to accelerate growth in FY12, management yesterday announcing an increase in capital expenditure plans to help achieve this goal. The funds will be spend on new and used equipment.

Capex is now expected to total $165 million by the end of FY12. This amount is around 20% higher than BA Merrill Lynch had expected, leading to estimates it could add around 4% to earnings per share (EPS) in FY13.

The capex will target the core Australian and Canadian markets, something Credit Suisse expects will improve the sustainability of Emeco's earnings through the cycle. While there is some operational risk from a lack of customer contracts to date, Credit Suisse expects tight market conditions will keep equipment utilisation at solid levels.

The update on capex was accompanied by updated earnings guidance, which suggests net profit for FY11 will be between $55-$57 million. UBS had been forecasting a profit for the full year of $60 million, so its estimate for FY11 has been trimmed slightly.

The higher capex is a positive for earnings beyond the current year however, so UBS has lifted estimates for FY12 and FY13 by 4-8%. This reflects the expectation there will be strong demand for the additional equipment Emeco will deploy.

Credit Suisse has also adjusted forecasts, trimming earnings estimates by an average of 3% through FY13. The changes reflect both the revised capex plans and changes to factor in currency movements and adverse weather conditions.

Post the changes to forecasts across the market, consensus estimates for Emeco in EPS terms according to the FNArena database stand at 9c for FY11 and 11.6c for FY12.

There has been one change in rating on the back of Emeco's update, Credit Suisse upgrading to an Outperform from Neutral previously. The upgrade reflects both improved value following recent share price underperformance and improved forward visibility with respect to earnings. 

This improved visibility stems from lead time on equipment continuing to expand to 12 months or more and an average contract length in Australia of more than 18 months. As well, Credit Suisse notes Emeco's overseas operations are now primarily exposed to lower cost resource production markets. This is expected to deliver improved returns through the economic cycle.

UBS similarly rates Emeco as a Buy, expecting the company will be a beneficiary of a particularly strong operating environment given significant mining capex expectations in Australia. This should deliver strong earnings growth, meaning Emeco shares offer value at current levels on UBS's numbers.

There is no argument from BA-ML, which expects Emeco will improve profits as the capex spend will grow earnings ahead of costs. At a current earnings multiple of around nine times on BA-ML's numbers the market is not pricing in this potential, states the broker.

Overall, the FNArena shows Emeco is rated as Buy four times and Hold once, this courtesy of Deutsche Bank. The consensus price target is 1.26, which is little changed from prior to yesterday's update.

Shares in Emeco today are higher and as at 11.00am the stock was up 3c at $1.075. Over the past year Emeco has traded in a range of $0.505 to $1.27. The current share price implies upside of around 20% to the consensus price target in the FNArena database.

 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms