##{"id":60008,"date":"2012-05-28T12:26:28","date_gmt":"2012-05-28T02:26:28","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2012\/05\/28\/emeco-defies-the-sceptics\/"},"modified":"2012-05-28T12:26:28","modified_gmt":"2012-05-28T02:26:28","slug":"emeco-defies-the-sceptics","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2012\/05\/28\/emeco-defies-the-sceptics\/","title":{"rendered":"Emeco Defies The Sceptics"},"content":{"rendered":"

\n\t – Emeco<\/span> Holdings reiterates full year guidance
\n\t – Update implies a stronger second half
\n\t – Brokers adjust earnings models
\n\t – Stock seen as offering value at current levels<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tLast Friday heavy earthmoving<\/span> equipment provider Emeco<\/span> Holdings ((EHL<\/span>)) 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.<\/p>\n

\n\tFull year guidance implies second half earnings of $37.8-$40.8 million against the $29.2 million delivered in the first half. In RBS<\/span> Australia's view this reflects incremental benefits from Australian and Canadian growth capex<\/span> deployed over the course of the year.<\/p>\n

\n\tThe other positive for RBS<\/span> is the benefits have been achieved despite a number of operating headwinds<\/span>, including rain-induced delays to work on Queensland coal contracts. The Queensland coal market represents 30% of Emeco's<\/span> total fleet.<\/p>\n

\n\tOffsetting the headwinds<\/span> has been the ability of management to renegotiate and restructure contracts. At the same time Emeco<\/span> has increased planned capex<\/span> for FY13<\/span> to $140 million from $80 million previously, most of which will go to Chile and Indonesia. <\/p>\n

\n\tRBS<\/span> estimates Emeco<\/span> can generate returns on capital of around 15% on the incremental capex<\/span>. This leads to increases in earnings estimates, as the expectation is utilisation<\/span> rates for Emeco<\/span> will remain solid. New contracts in Indonesia in particular offer a boost, as Deutsche Bank notes utilisation<\/span> rates in that market now stand at 88% against 73% in the first half of FY12<\/span>.<\/p>\n

\n\tFactoring in the capex<\/span> increase sees Deutsche lift earnings forecasts for Emeco<\/span> by 1% this year and by 2% in FY13<\/span>, while RBS<\/span> has increased its numbers by 2.5-5.0% through FY14<\/span>. Macquarie has gone the other way and trimmed its earnings forecasts modestly. Consensus earnings per share (EPS) estimates for Emeco<\/span> according to the FNArena<\/span> database now stand at 10.8c for FY12<\/span> and 12.8c for FY13<\/span>. The changes prompt one major adjustment to price targets, Macquarie lowering its target to $0.94 from $1.38 given lower sector multiples.<\/p>\n

\n\tGoing forward, BA Merrill Lynch sees the strong balance sheet of Emeco<\/span> 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<\/span> mean dividends could be increased. <\/p>\n

\n\tBA-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<\/span> business, the broker notes some execution risk would also be introduced.<\/p>\n

\n\tRBS<\/span> agrees recent share price declines have increased the value on offer in Emeco<\/span>, as on the broker's numbers the stock is trading at a 30% discount to the RBS<\/span> Small Industrials average of 8.8 times at current levels.<\/p>\n

\n\tThis discount is difficult to justify in the view of RBS<\/span>, especially given increased capex<\/span> spending outlined in the update last week suggests management remains confident in the near to medium-term outlook for Emeco's<\/span> markets.<\/p>\n

\n\tAs well, RBS<\/span> notes at current levels Emeco<\/span> enjoys solid yield support, as forecast imply a FY13<\/span> dividend yield of around 7.7%, rising to just over 8.0% in FY14<\/span>. This is enough for RBS<\/span> to retain a Buy rating, with a target price of $1.25, down from $1.30 previously.<\/p>\n

\n\tA majority of the market agrees with the positive view of RBS<\/span>, as the FNArena<\/span> database shows Emeco<\/span> 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<\/span> according to the database is $1.18, with targets ranging from Macquarie at $0.94 to Credit Suisse at $1.36.<\/p>\n

\n\tShares in Emeco<\/span> today are slightly higher in a stronger overall market and as at 11.25am the stock was up 1c<\/span> 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<\/span> database.<\/p>\n

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