The share price of Emeco Holdings Limited (ASX: EHL) has dropped 10% in response to the FY19 result.
Operating revenue increased by a pleasing 22% to $464.5 million and the heavy earthmoving equipment business reported that operating earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 40% to $214 million. The EBITDA profit margin increased by 590 basis points (or 5.9%) to 46.1%.
Operating earnings before interest and tax (EBIT) increased by 51% to $125.4 million with a good increase of the EBIT profit margin, which rose by 520 basis points (or 5.2%) to 27%.
Emeco's operating net profit after tax (NPAT) rose by 214% to $63.1 million and statutory NPAT jumped by 536% to $33.7 million. According to Bloomberg, the market was expecting a net profit result of $54.18 million.
The growth of profit was driven by a continued increase in average operating utilisation to 64% (up from 58% in the prior year), improvement in the rental rates, continued tight cost control and a full year contribution from Force and Matilda Equipment.
Emeco generated $90.1 million of operating free cash flow before growth capital expenditure, which enabled it to repay US$33.8 million of its 9.25% senior notes and invest in strategic growth assets to future earnings. Emeco deleveraged to 2x by the end of FY19, down from 2.6x in FY18. This is calculated as net debt / operating EBITDA. Clearly deleveraging is a good thing for the strength of the business.
For FY20 the objective set by management is to continue deleveraging by growing earnings and using cashflow to reduce debt. This will allow the company to refinance its debts on materially better terms at the optimal time.
Management also referenced strong demand in iron ore and gold projects in the west as a reason to be excited by significant opportunities to enhance commodity diversification.
Whilst Emeco is theoretically a bit less volatile the commodity businesses, and it reported an impressive result today, I don't like the idea of owning its shares because of how dependent it is on the large cyclical resource clients.
