The company has released its operational update for 4Q. Here we include some key points from the report
Today, Emeco released its 4Q operational update
to the ASX. It is important to read the 4Q update in the context of the last review we completed following the 3Q update, “Emeco update on third quarter performance”, included in the related articles below.
Key points from the 4Q update include:
- Shares are up 4% in early trade but on very light volumes (market cap ~$44m).
- Utilisation was down slightly from 3Q, falling from 75% to 74%. Having dipped significantly in calendar 2013 and 2014 (as low as ~45%), utilisation rates have remained fairly static around the low-mid 70% range since February 2015. However, increased utilisation rates have come at the expense of margin as a very competitive market with excess equipment is driving discounting
- Revenue was also down from 3Q, declining from $67m to $65.3m
- There was no detail provided on EBITDA or margins other than the following comment “There has been a significant increase in utilisation rates and an emerging improvement in margins as higher utilisation delivers fixed cost leverage”. This suggests that margins are improving slightly off a very low base
- Utilisation trends by region were similar to last quarter and broadly as expected, except for WA where the loss of a major contract has seen utilisation fall approximately 20%. The company is looking to move some of the excess WA fleet to Queensland and NSW which doesn’t bode well for conditions in the WA market
- Cost savings of $14m (up from $10m) targeted for FY16
Without specific information of EBITDA or margins it is difficult to assess whether Emeco will meet the FY15 guidance of EBITDA of $50m to $60m but we think the risk is to the downside - meaning that Emeco will likely miss or be at the low end of its guidance. However, it does appear that utilisation and revenue numbers are now relatively stable and that the outlook for margins is improving which should see EBITDA continue to improve from a very low base.
The key question to be addressed in the full year results is the extent of the improvement in EBITDA. These results are due 27 August 2015.
To put this into perspective, the current interest bill on the senior secured USD bonds is A$45.3m per annum. This assumes the amount is unhedged and an average exchange rate of 0.73. So, significant increases in EBITDA and cash balances are required to continue to operate confidently and ultimately refinance the bonds in 2019.