Key Points
- Revenues down 10.6% to $110.7m, while EBITDA was significantly down 56% to $16.2m
- Negative free cash flow of ($9.0m) versus $76.7m positive free cash flow in 1H14. Net operating cashflows were $13.7m vs $71.2m in 1H14
- $15.1 was generated from asset sales in 1H15, with agreements for a further $5.3m to settle in 2H15. $23.2m of assets in total remain classified as held for sale on the balance sheet
- Net debt is up from $301.994m to $360.655m, largely due to currency translation impacts
- Written down value of property, plant and equipment is slightly down to $570.4m
Segment by segment performance
Please note: the segment EBITDA’s below don’t add up to total EBITDA because of corporate costs.
- NSW – margins remain tight but utilisation is strong. Existing large thermal coal contract retained, with new contracts in gold and coal. $5.4m EBITDA
- Queensland – loss making but noticeable return of earthmoving contracts and activity. ($1.5m) EBITDA loss
- WA – good result underpinned by two long term contracts with mid tier gold producers. $7.7m EBITDA
- The Canadian business has held up reasonably well given the oil price decline and was the highest earnings segment for Emeco in 1H15. Canada generated $10.7m EBITDA in 1H15 vs $12.1m in 1H14, driven by high utilisation (83%) and a near full order book for the current winter works program. Only one winter contract was deferred because of the oil price decline. However, Emeco has flagged that rental rates will drop as oil producers reduce costs to retain profitability. Uncertainty remains as to contracts will be extended beyond the current winter works program in light of declining oil prices
- Chile results were disappointing, with set-up costs and delays in ramp-up leading to 1H15 EBITDA of $2.2m vs $6.6m in 1H14
Commentary and outlook
Emeco’s EBITDA performance is poor relative to previous guidance at the AGM, where the company indicated that 1H15 would represent about 30% of total full year EBITDA (which would be around the FY14 level of $72). On the basis that the 30%/70% 1H/2H weighting still applied, we estimate forecast full year EBITDA of between $50-$60m, but there is a high uncertainty factor in this estimate. Management confirmed this by indicating that FY15 EBITDA is likely to fall short of the $72m guidance given the slow start to the year, which is disappointing and provides more evidence that earnings have more ‘bottoming out’ to go. Despite Emeco showing a slight improvement in EBITDA margin in 2Q15 versus 1Q15, one quarter is really not enough to justify a recovery and we do not hold confidence that this is the beginning of a turnaround to prior profitability levels.
Negative free cash flow and weak operating cashflows are of particular credit concern given the unlikely outlook for a near term recovery. We note that 1H15 operating cashflows were not sufficient to meet the 1H15 interest obligations, resulting in a slight reduction in cash balance over the period after allowing for asset sales. 1H15 cash flow was impacted by approximately $12m in one-off costs as a result of driving utilisation, including pre-rental costs in Australia and slower ramp-up on the Chilean contract. Asset sales are below previous periods as the company’s fleet size is now more broadly matched to meet demand for kit. $23.2m of assets in total remain classified as held for sale on the balance sheet but the company has only locked in $5.3m of sales for 2H15 at this stage.
It does not appear that any of the $75m asset backed loan has been drawn yet, meaning the bonds remain the only material debt outstanding. However, the company is funding some new equipment through operating leases, and can draw on 50% of the asset backed loan without any covenant requirements.
The continued fall in their EBITDA outlook below the already weak FY14, coupled with the FX revaluation on principal outstanding on the bonds has increased leverage to 6.0x on a net debt / forecast EBITDA basis, which would map to ‘CC’ leverage levels. Given the seasonality of results and capital intensity of the business, as well as strong market competition in the sector, we continue to remain highly cautious about the company’s ability to withstand a continued downturn in the mining services sector, and therefore service its coupons and principal through to maturity.