At time of writing, Emeco Holdings Limited [ASX:EHL] shares are trading at $2.13, which is just shy of being 25% down from yesterday’s trading price.
The company, which deals with selling, renting and maintaining earthmoving equipment across both the domestic and global mining industry, released their interim results on the ASX this morning.
While the results showed promising earnings and margin growth, the share price still plummeted on release. This may be due to negative sentiment surrounding the company’s previous and planned business investments.
Interim results reveal positive growth
The report revealed ‘significant earnings growth’ for the company. Operating revenue was up 31% from the 2018 corresponding period, growing from $171.2 million to $224.3 million.
Operating EBIT (earnings before interest and taxes) and NPAT (net profit after tax), were up 60% and 160% respectively.
According to the company, key factors led to this impressive growth.
Firstly, a full contribution from Matilda — a Queensland-based equipment rental company — and Force, a WA-based counterpart company. Growth also came from an improved average operating utilisation of 64% from 57% in 1H18.
Such strong cash flow allowed the company to make ‘significant investments’ in 1H19. This included a $20 million asset purchase deposit ‘to secure strategic high demand core asset prices, which will generate strong returns’. An additional $5 million was put towards inventory ‘to ensure security ofo [sic] supply’ of equipment.
The company says these asset investments will aid in earnings and cash accumulation in FY20.
Why has this caused Emeco’s share price to fall?
While Emeco are clearly working toward further future growth, investors may be unhappy with the impact these investments will have on the FY19 leverage.
A company’s leverage is essentially their debt-to-equity ratio. The lower the ratio, the better the reflection of the company, for it means the value of their shares are higher.
Emeco are gearing towards deleveraging (or decreasing their debt-to-equity ratio) through these business investments. But the payments made this year have brought FY19’s leverage to a plateau.
This doesn’t seem to be sitting well with investors.
However, once this deleveraging starts to gain momentum, which looks likely given the promising interim results, this sentiment could shift in the other direction.
Of course, an unforeseen future hurdle could impact this process.
We’ll have to wait and see.
For Money Morning
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