Australia | May 28 2012
– Emeco Holdings reiterates full year guidance
– Update implies a stronger second half
– Brokers adjust earnings models
– Stock seen as offering value at current levels
By Chris Shaw
Last Friday heavy earthmoving equipment provider Emeco Holdings ((EHL)) delivered a trading update to the market that reiterated previous full year net profit after tax guidance of $67-$70 million. The update confirms interim result commentary of stronger second half earnings.
Full year guidance implies second half earnings of $37.8-$40.8 million against the $29.2 million delivered in the first half. In RBS Australia's view this reflects incremental benefits from Australian and Canadian growth capex deployed over the course of the year.
The other positive for RBS is the benefits have been achieved despite a number of operating headwinds, including rain-induced delays to work on Queensland coal contracts. The Queensland coal market represents 30% of Emeco's total fleet.
Offsetting the headwinds has been the ability of management to renegotiate and restructure contracts. At the same time Emeco has increased planned capex for FY13 to $140 million from $80 million previously, most of which will go to Chile and Indonesia.
RBS estimates Emeco can generate returns on capital of around 15% on the incremental capex. This leads to increases in earnings estimates, as the expectation is utilisation rates for Emeco will remain solid. New contracts in Indonesia in particular offer a boost, as Deutsche Bank notes utilisation rates in that market now stand at 88% against 73% in the first half of FY12.
Factoring in the capex increase sees Deutsche lift earnings forecasts for Emeco by 1% this year and by 2% in FY13, while RBS has increased its numbers by 2.5-5.0% through FY14. Macquarie has gone the other way and trimmed its earnings forecasts modestly. Consensus earnings per share (EPS) estimates for Emeco according to the FNArena database now stand at 10.8c for FY12 and 12.8c for FY13. The changes prompt one major adjustment to price targets, Macquarie lowering its target to $0.94 from $1.38 given lower sector multiples.
Going forward, BA Merrill Lynch sees the strong balance sheet of Emeco as a positive given it provides management with a number of options. Comfortable gearing levels offer potential for a share buyback, while surplus franking credits of around 15c mean dividends could be increased.
BA-ML also sees potential for M&A activity given a recent correction in sector equity valuations. While this would offer scope for further diversification of Emeco's business, the broker notes some execution risk would also be introduced.
RBS agrees recent share price declines have increased the value on offer in Emeco, as on the broker's numbers the stock is trading at a 30% discount to the RBS Small Industrials average of 8.8 times at current levels.
This discount is difficult to justify in the view of RBS, especially given increased capex spending outlined in the update last week suggests management remains confident in the near to medium-term outlook for Emeco's markets.
As well, RBS notes at current levels Emeco enjoys solid yield support, as forecast imply a FY13 dividend yield of around 7.7%, rising to just over 8.0% in FY14. This is enough for RBS to retain a Buy rating, with a target price of $1.25, down from $1.30 previously.
A majority of the market agrees with the positive view of RBS, as the FNArena database shows Emeco is rated as Buy three times and Hold twice, Macquarie downgrading to a Neutral rating from Buy post the update. The consensus share price target for Emeco according to the database is $1.18, with targets ranging from Macquarie at $0.94 to Credit Suisse at $1.36.
Shares in Emeco today are slightly higher in a stronger overall market and as at 11.25am the stock was up 1c at $0.875. This compares to a range over the past 12 months of $0.83 to $1.197, the current share price implying upside of around 45% relative to the consensus price target according to 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.
