Emeco Doesn’t Need Private Equity

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

 By Chris Shaw

Shares in heavy machinery provider Emeco Holdings ((EHL)) enjoyed a strong rally from the time in mid August the company announced it had received an indicative, non-binding proposal from private equity to acquire 100% of the company, the stock running from around the 70c level to near the $1.00 mark on the news.

But that offer from private equity has now been withdrawn, Credit Suisse suggesting the attractiveness of the company as a target was significantly reduced by the share price strength as the gains closed the gap between the traded price and Emeco’s net tangible asset backing.

With the bid having been withdrawn, the broker expects the market will now focus on the company’s sustainable earnings and here the news is improving as volumes in resource markets are picking up as economic conditions generally continue to improve. The other attractive feature in relation to the stock in Credit Suisse’s view is the cash flows that have been generated have allowed debt to be reduced, its numbers suggesting net debt to equity will fall below 40% in FY10 against the 48% recorded in FY09.

One key for the company according to the broker is its ability to recycle underperforming capital away from markets in Europe and Canada and into its Australian and Indonesian operations, so generating improved returns. The effect of this is significant as on the broker’s numbers for every 1% increase in utilisation the company enjoys a 3% increase in earnings per share (EPS).

UBS suggests Emeco’s earnings outlook is also improving thanks to expectations of increased iron ore production and capex in the sector, which it estimates could indirectly impact as much as 20% of the company’s fleet. To reflect this the broker has lifted its EPS forecasts by 3-7% through to 2014, which has lifted its valuation on the stock to $0.90 from $0.75.

UBS’s new EPS numbers are for the company to earn 8c in FY10 and 12c in FY11, while Credit Suisse’s forecasts call for 8.9c and 10.7c respectively. This puts Credit Suisse slightly above guidance from management with respect to FY10 earnings, but the broker sees this guidance as conservative given there are signs market conditions continue to improve. Consensus forecasts according to the FNArena database stand at 7.4c and 10.4c respectively.

Given higher EPS forecasts, it is little surprise Credit Suisse’s valuation on the stock is higher than that of UBS at $1.00 per share, which is where it has set its price target. As the share price is somewhat below this level the broker retains its Outperform rating, supported by its estimate the stock is trading on a forward P/E (price to earnings ratio) of around 9.4 times, which is a 30% discount to the average small cap trading multiple of around 13 times.

The average price target on the stock according to the FNArena database is $0.756, up from $0.726 prior to the latest update from the company. In ratings terms the database shows the stock scores one Outperform rating, four Holds and one Sell. Of note, Credit Suisse and UBS are the only brokers covering the stock to have yet updated for Friday’s announcement of the private equity offer being withdrawn.

Shares in Emeco today are weaker and as at 10.40am the stock was down 2c at 82c, which compares to a trading range over the past 12 months of $0.16 to $0.995.

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