Friday 13 March 2015 by Alen Golubovic Company updates

Emeco to acquire truck and trailer rental business Rentco

Emeco trucks in sunset

Key points

  • Emeco has announced that it has agreed to acquire national truck rental business Rentco based on a minimum equity value of $53m (enterprise value of $82m), representing an EV/EBITDA multiple of 4.7x (implies LTM EBITDA of $17.4m)
  • The maximum equity value payable could be up to $76m, subject to the performance of Rentco over the next three years. The terms of the profit sharing were not provided, but they are based on EBITDA growth
  • Rentco is one the largest players in the Australian road haulage rental market. Its fleet consists of 1500 trailers, 185 prime movers plus ancillary equipment. In FY14 Rentco generated revenue of $45m and EBITDA of $19m
  • The consideration for Rentco consists of a combination of upfront and deferred cash, staged asset acquisitions, profit sharing payments, and shares in Emeco which are subject to a four-year staged escrow period
  • The acquisition provides Emeco diversification outside of mining into the more profitable road haulage rental market, but weakens its shorter term liquidity position

Commentary

The consideration for Rentco represents an EV/EBITDA multiple of 4.7x and is made up of the following items. It will be funded from Emeco’s existing liquidity reserves and retained earnings from Rentco over the earn-out period.

  • Upfront cash: $12.5m
  • Deferred cash: $7.3m
  • Staged asset acquisition over three years: $20.7m
  • Emeco shares at 12.6c: $11.4m
  • Minimum consideration: $51.9m
  • Three year out based on average EBITDA ($0-$23m)

Emeco is not using debt to fund the acquisition, and has staggered most of the payment profile. The deferred payments are unsecured obligations which need to be made ahead of the secured bond from a timing perspective. Rentco appears to be performing well as a business, with a FY14 EBITDA margin of 42%, but 1H15 looks a little weaker based on the EV acquisition multiple. This compares to a 14.6% EBITDA margin on Emeco’s 1H15 result, and a 29.9% margin on Emeco’s FY14 result. Having said this, based on an assumption of $7m capex/depreciation per annum, the implied EV/EBIT multiple 7.9x looks toppy for a truck rental business offering no synergies.

The acquisition represents a step out of mining and will diversify Emeco’s overall earnings base. Industry dynamics in the road haulage industry have been positive – national freight volume has grown at a compound average growth rate of 3.4% over the past 10 years. The margins on the Rentco business are healthier than Emeco’s and the road frieght industry has been in a growth phase.

Offsetting this, is the fact that fleet rental businesses are highly competitive and margins can be quickly squeezed if conditions deteriorate, as we’ve seen with Emeco’s fate in the mining sector. Rentco’s business is leveraged to economic growth in Australia, where the prospects for low growth are seemingly more likely. The Rentco business is relatively small in the context of Emeco’s debt burden so it is unlikely the immediate credit metrics will improve enough to justify an improved credit rating.

Emeco has stated that the fleet value contribution is $70-$75m on a written down value basis, offset by $24m of secured hire purchases, which means the transaction adds about net $50m of truck and trailer assets to Emeco’s existing mining fleet. Capex / depreciation is about $7m per annum, the average truck life is four years based on an eight year useful life, and the trailers get continuously rebuilt. However, it is unclear whether Rentco’s assets will fall into the security net of the bonds and this is something we are following up.

Over the longer term, we consider the acquisition to be a moderately net positive move for bondholders given:

  1. The diversification in revenues outside of mining.
  2. No debt used to fund the acquisition.
  3. Additional truck/trailer assets added to the balance sheet, offset by weaker liquidity for the company in the shorter term.

However, the company has provided limited details on the outlook of Rentco, its cashflow generation and the terms of the earn-out so our view could change as further information comes to hand. For example, the earnings contribution from Rentco is relatively small at this stage. If earnings were to grow materially over the next few years then this could become a more positive outcome for the bonds.

Disclaimer

The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or  distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.