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Meet the ASX stock that could pay its first dividend in 8 years

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The Emeco Holdings Limited (ASX: EHL) share price surrendered its morning gains even though it could pay its first dividend in eight years.

The EHL share price dipped 0.6% to 80 cents during lunch time trade after jumping by nearly 4% at the open.

In contrast, the S&P/ASX 200 Index (Index:^AXJO) was trading 0.2% lower as mining and real estate stocks slumped.

Best balance sheet since IPO

Investors had initially taken a shine to Emeco after the heavy machinery rental group after it redeemed its US$142 million ($195 million) March 2022 notes.

The repayment of the debt enables management to extend the maturity of its $97 million revolving credit facility to September 2023.

Management now has $153 million in accessible cash following last month’s capital raising.

Emeco could restart paying a dividend

Emeco is now claiming its balance sheet is the strongest it’s ever been since it floated on the ASX in 2006.

It’s proforma net debt of $224 million gives it a net leverage of 0.9 times, while its pro forma interest coverage stands at 9.8 times.

More significantly for investors, Emeco could be about to restart paying a dividend – something it’s stopped doing since early 2013! This assumes it doesn’t use the cash to make a sizable acquisition.  

Good outlook for cash flow

“With longer tenor on significantly reduced total debt and lower interest expense, we are set to generate strong free cash flow in the years ahead,” said Emeco’s chief executive Ian Testrow.

“This allows the Emeco team to fully focus on running the business and continue our evolution to becoming a leading mining services solutions provider.

“We are excited to now be in a position to have the flexibility to implement a complete capital allocation framework, including distributions to shareholders in the future, as appropriate.”

Foolish takeaway

News that China is curtailing Australian coal and the global transition towards decarbonisation could impact on Emeco’s business.

But I believe the stock is oversold. Emeco can offset the loss by picking up work from other mineral miners, including gold producers.

In fact, the group announced yesterday that it won an open pit mining contract for Red 5 Limited’s (ASX:RED) Great Western Project, south of the Darlot Gold Mine, commencing in January 2021.

Given the near record high gold price and the bullish outlook for the precious metal, demand for Emeco’s services should stay robust through next year, if not beyond.

The stock looks cheap and this weakness is a buying opportunity.

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Returns As of 6th October 2020

Motley Fool contributor Brendon Lau owns shares of Emeco Holdings Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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