Emeco Holdings (EHL) – Buy
Concerns over a slowdown in mine investment and the impact on capital intensive exposures has seen Emeco sell-off sharply, despite recently delivering a full-year 2012 result above expectations. Investors' concerns appear focused on the Australian fleet and both the relatively low level of current utilisation (about 76%) and contract renewals in the fleet exposed to thermal coal (about 10% of the domestic fleet). Utilisation should approach 80% by November with recent renewals and we see the current share price as implying that none of the thermal contracts due in December are renewed.
Emeco's business is substantially different from the one that endured the global financial crisis with an exit from North America, Europe and the Victorian Civil business. In excess of 90% of revenues today are production-based and with Emeco trading at a 5% discount to net tangible assets (NTA) and 3-times its estimated full-year 2013 earnings before interest, tax, depreciation and amortisation (EBITDA), we retain our Buy rating with a target price of $1.09 per share. The presence of a 5% buyback is likely to provide a floor to the stock price.
- Recommendation: Buy (unchanged)
- Price: $0.71
- Target (12 months): $1.09 (previously $1.25)
- Expected capital growth: 54.3%
- Expected dividend yield: 9.0%
- Total expected return: 63.5%
Virgin Australia (VAH) – Buy (accumulate)
Virgin Australia's trading volumes have returned to more normalised levels over recent days as the short-term stimulant provided by the Etihad Airways demand has now been removed. We expect the focus to turn to the earnings outlook with particular attention on capacity and yield growth for Virgin’s domestic business. The year-to-date operating statistics in August contained no material surprises from our perspective with group passengers number up 2.4% with a revenue load factor of 77.3%. Domestic capacity growth for the first two months of fiscal 2013 increased 9.3% in-line with management's guidance of 8% to 9% for the first half of this financial year.