Broker cool on Emeco Chile move
15th Feb 2012
SYDNEY, Feb 14 – Australian mining services group Emeco has another test of its offshore management mettle on its hand with its latest Chile move. The company hasn’t acquitted itself well on this front so far, according to one broker.
“EHL does not have a good record of operating outside Australia,” said Austock Securities in a note following Emeco’s announcement about its Chile market entry. “There have been problems with the Indonesian business and both it and the Canadian operation run at much lower rates of utilisation than the Australian part of the group, so a step out into Chile opens another front in a battle EHL isn’t necessarily winning overseas.”
The equipment hire firm is spending $A50M on 10 new 240 tonne trucks, plus ancillary items, for delivery in FY13 for its move into Chile. Austock believes that if the new capex is incremental to FY13F forecasts factored in by the market, investors could stand by for another year of negative free cash flow (FCF) for Emeco – “making four of the seven years between FY07A-FY13F, including FY12F”.
“Given that returns on capital are front and centre of management focus, we must assume that this $50M investment will return in excess of the group’s cost of capital (c11% on our estimate), which implies annualised EBIT of at least $8M (incremental to c$150M group-wide in FY13F), but it highlights another problem,” Austock’s analyst said.
“One approach to diminishing the effect of $173M of goodwill on the balance sheet is to dilute it with incremental capital spend, which delays positive FCF to investors. That is one of my key concerns on this stock: that medium-term capex will always be higher than the market expects.”
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