Emeco’s Less Than Convincing Update

Investors have reacted oddly to heavy mining equipment outfit Emeco’s (EHL) trading update. The shares bounced yesterday, up 6% at one stage at 27.5c, before ending at 25.5c, a rise of 2% or a whole half a cent.

It was as though day traders and other investors are looking for hints of ‘good’ news from mining services, and grabbing every opportunity to test the belief that the sector maybe turning the corner.

Emeco happened to be the latest candidate, especially with muted talk of perhaps seeing an easing in the current tough conditions in 2014. But the financial nitty gritty of the update told another story.

Emeco said told the market in the trading update that it expects year to June earnings before interest, tax, depreciation and amortisation (EBITDA) of $90 million-$105 million, which is well short of market consensus of $130 million.

That will be down around 50% from the weak 2012-13 result, and yet the shares were chased higher in the morning before a bit of realism appeared and they returned to earth in the afternoon.

Emeco also flagged a net loss of $10 million to – $17 million, compared with consensus forecasts of a net profit of $3.1 million.

Some brokers were not happy with the market reaction and wondered why investors were chasing the shares higher when the update wasn’t all that solid.

Emeco hadn’t previously provided guidance after several downgrades leading up to its 2012-13 result.

That saw the shares sold off, now the question is whether this is another nasty downgrade, or a sign of a sliver of confidence.

EHL YTD – Emeco’s less than convincing update

Given the background of downgrades and underperformance (a bit like Boart Longyear) investors seem less than convinced about Emeco’s claims that it is more confident of industry conditions improving in the medium term.

Bell Potter and Shaw are not big fans and worried yesterday that the company faces more impairment losses as a result of asset disposals in the 2013-14 year. The company has already sold $18 million of assets in the current financial year, with more to come.

In the current depressed state, there’s not to many eager mining service asset buyers out there willing to pay book value for unwanted assets. It’s a market dominated with bottom fishers.

Emeco said yesterday the current first half had been impacted by customers’ ongoing caution towards earthmoving activities, with their focus on reducing spending in light of the ongoing subdued global commodity environment.

It said that the Australian business had remained challenging, particularly in the company’s main commodity sectors of coal and gold.

Emeco also said the Australian market remains highly competitive, effectively driving down rental rates and placing further downward pressure on margins.

That’s supported by Westrac, owned by Seven Group Holdings which last week revealed 630 people would lose their jobs, while confirming that earnings would be lower than most market forecasts.

This environment is unlikely to change any time soon and mining services companies have led the way in earnings downgrades in the past couple of months.

But Emeco has cut net debt from $455 million to $377 million since last January by using free cash flow, working capital and capex cuts.

But analysts point out that Emeco’s shares fell from 36c to 25.5c last week on fears about the company’s position.

That the shares ended on 25.5c yesterday after the early rise, tells us the company is still on the watchlist of most investors, with negative implications.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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