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.
Our valuation for Virgin Australia remains unchanged at $0.52 based on a one-year forward Price-to-Book multiple of 1.13-times and we have upgraded our rating from Accumulate to Buy. Our earnings per share (EPS) estimates remain unchanged as the July/August operating statistics were in-line with our expectations. We think the stock represents value after the recent share price decline and the company is well positioned to deliver earnings improvement over the short to medium-term driven by a change in the revenue mix and a lower cost base relative to Qantas.
- Recommendation: Buy (Accumulate)
- Price: $0.42
- Target (12 months): $0.52 (unchanged)
- Expected capital growth: 23.8%
- Expected dividend yield: 0.0%
- Total expected return 23.8%
GrainCorp Ltd (GNC) – Sell
The latest government crop report continues to suggest a significant correction in the east-coast winter crop. The report expects a 12% reduction in the three major winter crops – wheat, barley and canola – in 2012-13, down almost 30% from the record 2010-11 harvest that has underwritten the last two years of earnings for GNC.
We see the merit in GNC’s strategy to pursue vertical integration into grain and oilseed processing. However, we also see the share price as reflecting the benefit of back-to-back record crops.
We continue to see the estimated earnings base from full-year 2012 as inflated and at least 30% above what could be achieved under more normalised crop conditions. We retain our Sell rating and target price of $7.35 per share.
- Recommendation: Sell (unchanged)
- Price: $9.29
- Target (12 months): $7.35 (unchanged)
- Expected capital growth: (20.8%)
- Expected dividend yield: 6.5%
- Total expected return: (14.4%)
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