INVESTMENT RECOMMENDATION ************************************************************ Emeco Holdings (EHL AU, AUD$0.23, $138MM market cap) is a mining equipment rental business and provides swing capacity to large miners in Australia, Canada, and Chile (now with Indonesia officially being exited)
Results are depressed by a decline in commodity prices, with FY14 EBITDA likely down ~60% vs. the FY09-FY12 average.
EHL is an unloved equity, trading pretty much level since the start of CY14, with a 52-wk range of $0.17 - $0.44. It has (i) weak operating results, (ii) a halted dividend, (iii) a small market capitalization, and (iv) high leverage. EHL will not pay a dividend in FY14.
That said, EHL is attractive given: (i) the equity is trading at liquidation value (valuing assets at ~60% and liabilities at ~100%) and;(ii) EHL has enough liquidity to survive a prolonged mining downtown; even with EBITDA down 60%, the Company is FCF positive, and can deleverage further by divesting underutilised assets. EHL can materially reduce capex in down cycles.
EHL represents an attractive option on either, (i) mining service recovery (I concede this is highly unlikely in the short term), (ii) higher liquidation value than assumed, and (iii) any M&A take-out. Indeed, private equity tried as recently as April 2013 to acquire the Company for ~$0.76/share, which represents almost 3x upside and ~1x P/B. A normalized FCF valuation would see a valuation of ~$1/share, representing 4x upside. Peak valuations have been as high as $2/share.
Thus, buying EHL is buying a cheap option on the mining cycle, supported by investing at liquidation value. If you buy EHL at ~$0.23, you may not lose a lot of money (trading around liquidation value), but could earn 3x - 4x in the next 12 months. The risks appear to have already been priced in.
Keen to hear your thoughts/views.
Disclosure: I am long on EHL.
EHL Price at posting:
23.0¢ Sentiment: Buy Disclosure: Held
