Daily notes

Daily notes – Seven, Emeco, NRW, Cardno

Seven Group (SVW) – Key businesses catching the cycle… Emeco (EHL) – Demonstrating operating leverage… NRW Holdings (NWH) – Mining business strong… Cardno (CDD) – Still struggling…

Seven Group (SVW) – Key businesses catching the cycle

Sales in the Westrac division were up 25% during H1 19 compared to the corresponding prior period, driven by substantial growth in parts sales. EBIT from the division grew from $101m to $150m, with margins expanding from 8.4% to 10.1%. Segment assets remained broadly stable meaning that the increased sales and earnings were achieved with very little additional capital invested into the business.

The outlook for Westrac remains positive, benefitting from the growth in mining production. Parts volume to stay strong while service sales will benefit from an expected increase in maintenance activities, new machine assembly, and a rise in service rates due to the tight labour market.  

An increase in new equipment sales to be driven by activity levels in both mining and construction markets with customers investing in their replacement fleet.

Sales in the Coates Hire division grew by only 3% to $493m; however, EBIT was up 20% to $102m, reflecting the significant operating leverage in the business. The company reported that the East Coast is performing well although QLD has slowed and WA is showing signs of recovery.

NSW and VIC markets were flat due to a lag in the transition of significant projects and contractor issues. Time utilisation was slightly lower at 56.1% over the half. Infrastructure activity will continue to provide a strong tailwind over the medium term.

Sevens investment in Beach Energy along with its other energy assets are performing well with production and profitability ramping up at Beach and development progressing on the other assets.

The group wrote down the value of its investment in Seven West Media by $225m to $334m, which is closer to the market value of this holding. Beach, on the other hand, has an equity accounted value of $678m, significantly below the current market value of $1,285m.

Emeco (EHL) – Demonstrating operating leverage

Emeco reported increased average operating utilisation of 64% during H1 18, up from 57% in H1 18, which resulted in revenue increasing 31% to $224m, from $171m. Of the $53m increase in revenue, $36m fell directly to EBITDA, an increase of 53% from the corresponding prior period. EBITDA margins grew from 39.2% to 45.8%.

The company’s priority remains earnings growth through higher rates and utilisation with the existing fleet while at the same time, continuing to invest in expanding its fleet of rental equipment assets (both directly and via M&A) to take advantage of healthy market conditions.

Strong demand is predominantly being driven by coal market activity in the Eastern region, which is resulting in a tighter equipment market characterised by limited supply and longer lead times.

NRW Holdings (NWH) – Mining business strong

NRW grew revenue by 51% to $522.6m during H1 19 and EBITDA by 84% to $74.3m as EBITDA margins expanded from 11.6% to 14.2%. Revenue growth was driven by new work and existing contract expansion in the company’s mining business. Margin expansion was driven by higher activity, improved productivity and increased fleet utilisation.

The company has a current order book of $2.4b, with $1.08b in revenue secured for FY 19 and $20m in revenue left to win to meet guidance of $1.1b for FY 19. The company is seeing strong market demand and is placing a strong priority on recruiting and training their workforce to meet this demand.

NRW’s narrative aligns with what other participants in the sector are saying regarding strong market demand accompanied by tightness in supply of both labour and equipment.

Mining companies are looking to accelerate production, while at the same time governments around the country are undertaking large infrastructure programs, which bodes well for the sector over the next few years as the cycle unfolds.

Cardno (CDD) – Still struggling

The Americas engineering business showed improvement with revenue up 11.7% on PCP. The EBITDA margin increased from 3.6% to 4.5%. However, just as the Americas is finally starting to show signs of life, the Asia Pacific engineering business, which has been the strongest of the group over the last few years, printed a revenue decline of 1.5% on PCP and EBITDA margin decline from 9.1% to 5.9%.

Overall fee revenue was up 9.7% on prior year, however EBITDA from continuing operations was down 7.6% from the previous year to $27.9m due to roll-off of significant projects in H1 18 and a number of specific business costs in the Asia Pacific, business development investment and a higher proportion of revenues from lower margin businesses, i.e. the Americas.

Cardno, for the moment just seems to be spinning the wheels, while generating no discernable forward motion. Debt is back on the balance sheet, with net debt now $110.9m due to the funding of acquisitions during the half. Cashflow for the half was weak, with the conversion of EBITDA into operating cash flow of 17%, and elevated capital expenditure expected through the remainder of the year, after a period of underinvestment.  FY19 EBITDA is anticipated to be $60M plus or minus $3M, which is right in line with FY 18.

By Danny Sandler

Founder of Ocean Asset Management.