EHL.AX - Emeco Holdings

[ukvalueinvestment]

1) yes, you would expect that when here is overcapacity in the market.

2) but these alternatives have always existed yes Emeco continues to exist.  It does provide a useful service to the industry.  Imagine you have 2 years left for your mine.  Do you buy new equipment or hire it?  There is a useful presentation somewhere on their website.

[Hielko]

1) yes, you would expect that when here is overcapacity in the market.

2) but these alternatives have always existed yes Emeco continues to exist.  It does provide a useful service to the industry.  Imagine you have 2 years left for your mine.  Do you buy new equipment or hire it?  There is a useful presentation somewhere on their website.

Sure, at the right price renting equipment is a good deal and there is probably always room for a company that provides this service! But it is also always a comparison with the alternatives. We now know that one of those alternatives, buying second hand equipment, is now ~50% cheaper. You do the math on what this implies about Emeco's value proposition and the possible resulting impact on day rates. The fact that there is always going to be demand for rental equipment doesn't have to imply that Emeco is a good bet.

[yadayada]

Yeah im getting kind of annoyed that im trying to make a point and it somehow gets ignored with counter arguments like 'well without going into specifics'  :/ . Going into specifics is exactly how you get to the bottom of this thing!

 

I will give some % on write offs. In 2009, they sold equipment at more then a 30% discount. This was in an armageddon scenario where everyone thought the world was gonna end. And you think because one tiny department in Indonesia (where we dont even know asset mix yet) the entire fleet will now deserve a bigger discount then in 2009?

 

In 2013, they sold it without any write off when things were slowing down already, but inventory had a close to 50% write off. So again, it seems v unlikely that values of equipment like this is that volatile. Not even bulk carriers are this volatile. The only llarge assets this volatile are oil tankers.

 

Plus they moved some equipment to australia. So it is much more likely that this was v old equipment, otherwhise they would just keep it right? now they have to pay transport costs, and they have to pay storage costs because they cant use it now. They stated that they will work to keep their fleet relatively new in the crisis. So it wasnt brand new equipment they were selling here.

 

So obviously they have different type of assets here. And putting a 50% discount on the rest of their fleet doesnt make sense. If you put a 35% discount on their entire fleet and a small discount on receivables and a 50% discount on inventory, you get more then a 100 million in equity. And this discounts any future cashflows.

[ukvalueinvestment]

1) yes, you would expect that when here is overcapacity in the market.

2) but these alternatives have always existed yes Emeco continues to exist.  It does provide a useful service to the industry.  Imagine you have 2 years left for your mine.  Do you buy new equipment or hire it?  There is a useful presentation somewhere on their website.

Sure, at the right price renting equipment is a good deal and there is probably always room for a company that provides this service! But it is also always a comparison with the alternatives. We now know that one of those alternatives, buying second hand equipment, is now ~50% cheaper. You do the math on what this implies about Emeco's value proposition and the possible resulting impact on day rates. The fact that there is always going to be demand for rental equipment doesn't have to imply that Emeco is a good bet.

 

Who is going to be buying all this second hand mining equipment?  The miners?  They have CAPEX issues of their own my friend.

[Hielko]

yadayada: you seem to very comfortable ignore that the company basically said that the write-down reflects a global slump in values. Do you really think you know better than Emeco what the current market value of their fleet is?

 

Characterizing Indonesia as one tiny department is also twisting the facts pretty hard. That segment accounted for 28% of their fleet at the end of 2013 and had more assets than Canada en Chile combined!

 

Besides that your story about selling old equipment makes little sense imo. If anything you would expect the lowest write-downs on old equipment because 1. it will have accumulated significant depreciation 2. Prices generally rise. The older it is, the lower the cost basis/unit. I think it's more likely that they sold relative new equipment that was purchased at a high price and that had little accumulated depreciation.

[Hielko]

Also worth reading: http://seekingalpha.com/article/2230653-emeco-negative-developments-not-yet-reflected-in-the-price

[ukvalueinvestment]

It's worth remembering that the latest operating update talks about new contract wins in Australia providing a positive start to new fiscal year.  In addition, there is a "postive outlook" in Chile and Canada. 

 

So it appears that revenues and hence earnings are on the up.

[yadayada]

Iv been thinking some more about this and I found out that their fleet in Indonesia was actually pretty old. If you look at the % size of their fleet  (page 16)  it is 28% :

http://www.emecoequipment.com/upload/pages/annual-reports/appendix-4e-and-2013-annual-report.pdf

 

But if you look at the depreciated value it is only 132 million (page 132)

 

132 of 820 is only 16%. So this shows they used old equipment there.

 

They depreciate based on hours used. And have a smaller depreciation charge on idle fleet.

 

so:

-maintenance costs are higher % of price with old equipment, and more costly to operate (so not popular when everyone is trying to keep costs down)

-moving costs are a lot higher for old equipment % whise (in case youc ant lease it out in your current area). Shipping costs for a 200k$ dump truck depreciated down to like 20k$ could be 4-5k$.

-storage costs are higher (in a bad market they have to be stored longer % of their life, and much longer if its v old equipment with not much usefull life left)

 

 

I think that if Australia gets in trouble, and tehre is a large scale liquidation that needs to happen on time, equity holders are wiped out. But that seems unlikely. They are not heavily exposed to building of mines, but mostly to operating. They have large coal exposure, and coal demand is v likely to go up in the future. Seems this is pretty much a bet on coal. And if necesairy they can always just run break even cash wise, and slowly liquidate their equipment.

 

There is some risk with management being reckless, but CEO does own like 1 million$ worth right now I think?

 

Btw on equipment being sold for global prices:

http://www.emecoequipment.com/view/forsale/equipment-for-sale/query/stock/EXI021

 

http://www.agriaffaires.co.uk/used/track-excavator/1/3078/hitachi/ex1200-6.html

http://www.constructionsalesau.com/2009-hitachi-ex1200-6-for-sale/4106/

 

Sells elsewhere for twice as much with about the same hours.

 

vs some machines in Australia:

http://www.emecoequipment.com/view/forsale/equipment-for-sale/query/stock/EX149

 

http://www.mascus.com/construction/used-crawler-excavators/caterpillar-385c-l/bsdmbi5q.html

http://www.machineryzone.com/used/crawler-excavator/1/3049/caterpillar/385c.html

 

another one

http://www.emecoequipment.com/view/forsale/equipment-for-sale/query/stock/AT098

 

http://www.machinerytrader.com/list/list.aspx?Manu=CATERPILLAR&Mdltxt=735

 

Would be nice if we could check this for multiple machines ofcourse, because a sample size of 1 is shit. But still it is a pretty large discount to the rest of the world.

[Laxputs]

Is the Emeco Holdings listed on OTC the equivalent of EHL-ASX?  If I don't have an international brokerage, is there a downside to buying on OTC?

 

Thanks.

[Myth465]

Is the Emeco Holdings listed on OTC the equivalent of EHL-ASX?  If I don't have an international brokerage, is there a downside to buying on OTC?

 

Thanks.

 

Cheap trick.

 

Go to Google and type Emeco or the beginning of any company name.

Typically if there is an OTC listing it will come up as a 5 letter pink sheet holding.

 

https://www.google.com/finance?q=OTCMKTS%3AEOHDF&hl=en&ei=rFDWU9itA4LkkQXW5IGYAg

 

Second of all I live in Australia and prefer Boom Logistics and am looking at Swift Mining. Boom still makes money and is at a cheaper BV.

 

Third I only opened an IB account in Feb and until then always bought on the OTC, no issues. I always got dividends. Sometimes the bid asked sucked but even with IB I will likely go back to OTC for cheap (less than $3 stocks) to avoid really high commissions.

[Packer16]

Boom does look cheaper but it does have more exposure to Australian mining than does Emeco by the end of the year.  By YE Emeco will be more of a Canadian Oil Sands and  Chilean mining equip co vs. an Australian mining equip co.  Boom at that point will have more exposure to Australian mining.  I believe the Red Corner has a nice write-up about this.  No doubt Boom is cheaper but it depends upon the Australian mining outlook versus the other areas where Emeco serves.

 

Packer

[yadayada]

as for people afraid Australia will go the way of indonesia, take a look at receivables write offs. Almost all their profits in that region were decimated by those write offs. Also margins were bad. It seems in countries where safety is not a big concern, margins will probably be lower for EHL, as mine operators will care less about that sort of thing.

 

Also 30% of coal mines are now losing cash world wide, and the Chinese mines are in worse shape then the Australian mines. And only like 10% of China's coal is imported. Also most of China's coal is used for power generation for export and it's citizens. So this is not that likely to suffer in a recession there. ALso due to heavy rainfall the Hydro % of power has been bigger. So if anything we should see a switch to more coal soon there. Just looks very likely that at some point in the next few years a lot of coal mines will be shaken out, and demand at the best mines will pick up. Literally everywhere (including Europe), except the US, coal demand is extremely likely to go up.

 

As for gold, if China crashes, wouldn't gold price go up?

 

One thing I cannot put my finger on is why their margins are so good, and why they manage to be the largest players in Australia and Canada now. It really does seem like they somehow do something really right there that is not that easy to replicate by someone else with a lot of access to capital? EBITDA margins compared to Boom for example are pretty amazing.

[Hielko]

I don't think the diversification away from the mining and resource sector in Australia is that different when you compare Emeco with Boom. Emeco has diversified geographically and is now active in Canada and Chile while Boom is not geographically diversified, but has more customers than the mining and resource sector. They also do construction work, infrastructure, work for wind mill farms etc.

 

But IMO it's at this point in time mostly about the asset values. It doesn't matter than Boom only operates in Australia because they can sell their equipment internationally, and that is exactly what they have been doing and so far at way lower discounts than what Emeco has been doing.

[Packer16]

I think the ultimate values here are dependent upon a mining recovery.  I just think there is a better chance in Chile and the Canadian oil sands than in Australia.  If there is mining recovery both will do well.  How much better Emeco will do is hidden is there lower current EBITDA.  If there is a recovery, I think they have more operational leverage than Boom but both should do well in any mining recovery.  As to the downside, I see both having a difficult time in that scenario and not sure I would invest in either one if I thought was most likely.

 

Packer

[Laxputs]

OK, just to reiterate, Emeco on the pink sheets is the same as EHL-ASX. And seems just as safe. But volume appears drastically different so building a 6 figure position on the pinks looks challenging.

[yadayada]

you can convert v cheaply to AUD on IB. and just buy the australian one.

[Laxputs]

I don't have an IB account. I'm Canadian, IB would be my only option. And I didn't like their software or feel comfortable using it so I closed it. Thus it's currently OTC or nothing for me. So just want to get an opinion on how safe it is and if volume looks like it will work.

[yadayada]

You have to get used to it, I like it best now. You save money, and have a very wide selection of stocks.

[mbrock77]

Is there a bias towards dividends vs. buybacks in Australia? It seems that a number of these beaten down Australian companies are heavily focused on paying out excess cash flow in the form of dividends when the argument could be made that buybacks would be a much better use of cash. I'm just curious if this is a cultural thing or just has to do with the (very few) companies I've looked at.

[topofeaturellc]

Part of it is that dividends taxation there includes franking.

[Myth465]

I would say yes.

If the company has been a full AUS tax payer than you get credits for the taxes they have paid.

 

Interest is taxed at marginal tax rates and dividends at a much reduced rate with these credits.

Dont see too many companies doing buybacks though I have just started digging into the AUS markets.

[one-foot-hurdles]

I find that most Australian company boards are biased towards paying out dividends

[writser]

http://www.asx.com.au/asxpdf/20140818/pdf/42rjgnn5z61532.pdf

 

Nice win.

[Laxputs]

Nice to see 50% utilization from one project alone. How much ebitda will this generate (normally they have 3 sections of revenue: rental, maintenance, and parts--will they offer all three here or has parts been discontinued)?

 

11mm ebitda?

[60North Investments]

http://www.emecogroup.com/upload/pages/20140821_ehl_fy14annualreport/20140821_ehl_fy14annualreporttoshareholders.pdf?1408593994

 

FY 2014 annual report was released today along with conference call. My quick takes on it: very big writedowns, average utilization in fiscal at 48%, currently up though. In the CC they estimated that utilization might come up 5-10% (not sure whether they meant just the 1st half of full year). They were happy with the new bond financing as it takes the covenant issues out. Around the end of 2016 they will most likely look at refinancing the bond to a lower rate, if they do it before it means some penalties. This seemed to imply that since they want to bring the net debt down, they'll be piling up the cash for then next couple years. To a question regarding the actions and intentions of the new management team they replied that the processes etc. were already fine, they just focus on being closer to customers and finding new ways to do business. We'll see how they succeed in this.

 

Interesting to hear what others took away from the report and how the future is seen.