A cyclical stock on its way back up

Emeco leases heavy earthmoving equipment to mining companies and their contractors. It is the largest company of its type in Australia. With mining activity beginning to pick up again, the demand for “yellow” trucks, diggers and dozers is picking up. 

There are now limited numbers of vehicles available for sale and the time lag to get new vehicles has blown out.  Emeco’s full year result has seen the utilization of its fleet picking up and lease rates are beginning to improve too. 

The mining vehicle leasing business is highly cyclical and has both operational and financial leverage. Following the resources cycle bust, mining contractors handed back their vehicles and there was a glut. Lease rates collapsed and fleets had low levels of utilization. The price of second-hand vehicles collapsed too, leading to large write downs. 

It was a near death experience for Emeco and its competitors, who went into losses. Emeco’s stock price collapsed. Four years later, there has been debt for equity swaps, industry consolidation and the glut of vehicles is no more. 

In the next couple of years, Emeco’s fleet utilization and lease rates will return to levels that are more normal. With its balance sheet now on the path to recovery, and facing a less competitive environment,

Emeco will see its profitability soar from the current depressed levels. 

It is a great exposure to a recovery in mining services because unlike mining contactors it doesn’t carry project execution risk.

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In 2012, Monash Investors was established by one of Australia’s most experienced fund managers in Simon Shields, the previous head of equities at both UBS and CFS, and Shane Fitzgerald a senior equity analyst from UBS and JPMorgan. The firm was...

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