Key points:
- Revenue and EBITDA were both down compared to FY13 however EBITDA of $72.1m was in line with guidance of $72m to $75m.
- Emeco’s weaker performance in FY14 reflects the challenges currently faced in the broader mining services sector in terms of both low utilisation levels (~50%) as well as pressure on margins in what is a competitive sector.
- Emeco represents good relative value in comparison to other USD bonds with mining sector exposure.
Summary of FY14 Results
- Revenue down 36% to $241m
- EBITDA down 55% to $72.1m, in line with guidance of $72m - $75m
- Operating NPAT loss of $21.6m, down from a $28.5m NPAT in FY13
- Statutory NPAT loss of $224.2m reflecting expected goodwill impairment, as well as $43.7m in tangible asset impairments
- Net debt to EBITDA up from 2.15x in FY13 to 4.78x in FY14
- Net debt down from $414.7m at FY13 to $323.3m at FY14
- EBITDA / interest expense down from 7.72x in FY13 to 2.83x in FY14
- Global fleet utilisation averaged 48% over FY14, but has improved to be at 58% as at August 14 and has shown a steadying upturn
- 30 June 2014 cash balance of $42.4m; with $40m in written-down value (WDV) held as assets held for sale scheduled for disposal in FY15
- Strategic review complete with decision to exit the loss-making Indonesian business
Emeco’s weaker performance in FY14 reflects the challenges currently faced in the broader mining services sector in terms of both low utilisation levels (~50%) as well as pressure on margins in what is a competitive sector. Since 30 June, Emeco has noted more positive news, with an uptick in fleet utilisation to 58% (see chart below), as well as securing a large 5-year contract in Chile (expecting to deliver ~$30m pa in revenues and underpin at least 50% utilisation in Chile even before allowing for other contracts).
Capital Management
The company’s results webcast drew out some important insights for the business’ focus in the near term. Capital management, and in particular deleveraging, will be a key consideration for Emeco over FY15 and beyond. What this specifically means is:
There will be a focus on reducing net debt, generating cashflow and improving the net debt / EBITDA ratio. In the webcast, Emeco noted that the rating agencies are “looking for a net debt to EBITDA of 3.00x as a target”. While Emeco management didn’t specifically commit to this number as their own target, it does set a marker for where they see the gearing level needs to be at, and reducing net debt has been highlighted as a top priority for the CFO.
Emeco is not intending to draw down on the super-senior bank facility in FY15. This is moderately positive for the credit position of the secured bonds, in that their security position won’t be diluted and any additional cash generated will be used to reduce net debt and fund sustaining capex.
Emeco won’t pay down the bonds because the make-whole provisions for the next 2.5 years make it prohibitive. Therefore, we expect they will look to build up cash in the company to reduce net debt. There is no intention to buy back equity or pay dividends in the medium term, either, while Emeco is managing its way through the bottom of the cycle.
Following the FY14 results, Emeco is currently highly leveraged in the context of its credit rating but has the flexibility to manage down this leverage through asset disposals as it has done over the last 12 months. This has allowed it to increase its cash balance to $42.4m at FY14.
Relative Value
Below is a relative value comparison of Emeco’s bonds against other high yielding US dollar bonds based on indicative yields to maturity. As the chart indicates, Emeco represents good relative value in comparison to other USD bonds with mining sector exposure.
Summary
Indicatively offered at a yield to maturity of 8.9%p.a., the Emeco senior secured 2019 bonds are currently some of the highest yielding bonds on offer. The Emeco bonds suit an investor looking for high yield with a willingness to accept the higher risk associated with the mining sector, and in particular mining services businesses, but also prepared to take a view that there will be continuation of uptick in utilisation levels and that Emeco can manage its way out of the bottom of the mining cycle. In addition, the bonds carry the additional enhancement of being senior secured, backed by a ‘yellow goods’ tangible asset base.
While the result for FY14 is disappointing, it was not unexpected in the context of the current downturn in the mining cycle and was broadly in line with recent company guidance. Looking forward, from a credit perspective there were some positive take-aways from the result:
- The recent uptick in utilisation levels in August to 58%, with Emeco’s expectation to maintain or slightly increase utilisation levels into FY15
- Diversification between Australian and international operations. With the new contract win in Chile, Emeco expects a 50/50 revenue split between Australia and offshore
- The ability to redeploy fleet from Australia to offshore businesses to manage utilisation levels without having to dispose of fleet
- Cautious capital management activity, a focus on reducing net debt and leverage, building up cash and liquidity in the business, without drawing on the super-senior bank facility
Overall, the Emeco bonds represent good relative value versus other high yielding US dollar bonds with mining sector exposure, however, note the higher risk attached to these bonds in what is a challenging operating environment.
Note: prices and yields are accurate as at 22 August 2014, and are guide only and subject to market availability. FIIG doesn’t make a market in these securities.