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Here’s why Emeco Holdings Limited jumped after buying itself a new lease of life

Mining equipment rental business Emeco Holdings Limited (ASX: EHL) has finally given shareholders something to cheer about with shares in the embattled company jumping to a two-month high this morning.

Emeco announced it would buy one of Australia’s largest road haulage truck and trailer rental businesses in a deal that would add about $19 million to Emeco’s earnings before interest, tax, depreciation and amortisation (EBITDA) on a full year basis.

That’s a substantial boost to earnings given that Emeco’s first half operating EBITDA came in at $16.2 million.

The market liked the news with the stock surging 20.8%, or 2.5 cents, to 14.5 cents. But the expected lift in profit isn’t the only reason to get investors excited.

The deal to buy Rentco appears to represent a viable way for Emeco to diversify away from the mining industry. Demand for equipment has fallen as miners have cut back on capital spending in the wake of the commodities slump.

Rentco owns around 1,800 trucks, trailers, and ancillary equipment around Australia and is seen as a market leader with an average equipment utilisation rate of 78% over the past three-and-a-half years.

Demand for road freight tends to track gross domestic product (GDP) and not investment cycles, which should lend greater stability to Emeco’s business.

The deal also appears to be priced relatively attractively. Emeco will pay $53 million for the business with a potential earn-out of up to $23 million if certain EBITDA targets are achieved. This would put the deal on a 4.7 times enterprise-value to EBITDA multiple.

The acquisition will be funded from Emeco’s cash reserves and from profits generated by Rentco.

The transaction will put the focus on crane hire company Boom Logistics Limited (ASX: BOL) as the company is also being heavily weighed down by the mining sector.

I am expecting to see analysts upgrade their earnings projections for Emeco on the back of this deal and I suspect Emeco could enjoy a re-rating after the stock slumped over 40% in the past 12 months.

Nonetheless, Emeco remains suited only for those with a strong stomach for risk as I expect the stock to remain volatile.

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Motley Fool contributor Brendon Lau does not own shares listed in this article. Follow me on Twitter - https://twitter.com/brenlau

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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