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Emeco (ASX:EHL): cyclical recovery

Glennon likes to invest long term. This is the best way to sustain good, consistent performance over time. Problem is short term bumps along the road can appear, often without rhyme nor reason, which makes for nervous times as an investor … what have we missed, have we miscalculated? Nevertheless, it’s important to stick to our guns where we are confident we have done our research well.

One of our largest holdings, heavy equipment rental group Emeco (EHL.ASX), is a recent case in point. The stock peaked at 31c mid-March this year (at which point Glennon had doubled its money since purchasing early in the company’s recovery cycle).

For some un-prompted reason the shares then fell 16% to 26c by mid April. That’s a significant enough fall to cause some serious head scratching.

Since then there have been a string of announcements that have restored confidence and the stock has recovered some of the lost ground. First it released a 3Q performance update in mid-April that confirmed operations and earnings were at least on-track with the market’s expectations (EBITDA equating 49% of consensus 2H estimates with solid momentum suggesting potential upside).

At the end of April the company announced the acquisition of another complementary business – Matilda Equipment – and an entitlement share issue which will help pay for the purchase and further accelerate the de-leveraging of the balance sheet. It’s the fourth significantly accretive acquisition, financially and strategically, it has made in less than 18 months.

And just days ago we watched the CEO, Ian Testrow, present confidently to the Macquarie Conference in Sydney where he re-confirmed the improving state of the market and Emeco’s progress as well as expanding on the benefits of the Matilda acquisition.

He also touched on a key point that doesn’t get as much attention as it should – probably because it is unlikely to have a material impact until FY21 (with a potential smaller benefit late in FY20). With our long term investment hat on that’s OK by us. As the company de-leverages its balance sheet, utilising the cashflow from its recovering and growing earnings base, it will have the chance of replacing some very expensive corporate debt in April 2020 with much cheaper bank debt. The fees to unravel the onerous notes is too high right now but the penalties reduce significantly in 2020 and it will potentially lead to interest expense reducing by more than half in FY21 and enabling the company to continue a string of forecast strong double digit earnings growth years.

So, given the momentum being experienced by the group now, the efficiencies and growth opportunities produced by its acquisitions and the reduction in interest expense three years out, we can see ourselves holding this stock for some time to come … assuming the share price doesn’t get too far ahead of itself. We like those kinds of investments, good clarity over time. Now it’s up to management to make the most of what they’ve got.

Our nervousness is dissipating with every cent of share price recovery.

Any information has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives., financial situation or needs, It is not an offer or invitation for subscription or purchase, or a recommendation of any financial product and it is not to be relied on by investors in making an investment decision. Past performance is not a reliable indicator of future performance. To the extent any general financial product advice is provided in this document, it is provided by Glennon Capital Pty Ltd ACN 137 219 866, AFSL No. 338 567. An investor, before acting on anything construed as advice, should consider the appropriateness of such construction and advice having regard to their objectives, financial situation or needs.

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