Selected presentations from the 2015 Asian Investing Summit.
Peter Kennan, Chief Investment Officer, Black Crane Capital
Emeco – Corporate Finance Driven, Deep Value – Asia Opportunities Fund
Overview of Emeco
- Largest mining equipment rental company in the world
- Formed in Western Australia in 1972 as a family owned business
- It was acquired by a syndicate of private equity investors in 2005 and then floated on the ASX in 2007
- Emeco’s business is focused on the major mining houses and increasingly it is working in partnership with the major Caterpillar distributors to service the equipment needs of the world’s major mining houses
Emeco Fleet Composition
Share price chart
Cash flow generation through the cycle
Capital Structure & Debt
- In October 2013, Emeco issued a US$355m 144A bond with a 5 year term. The net proceeds were from the bond were used to repay existing facilities.
- Emeco also has a A$75m asset backed facility which is currently un-drawn
- The notes do not include maintenance covenants, the asset backed facility has the following covenants (if drawn above a specified level):
- Liquidity ratio – Net debt: Net tangible assets; no greater than 65%
- Interest cover ratio – Operating EBITDA: Interest Expense, no less than 2.25 times
144A 2019 9.875’s Bond Price Performance
- Downside protected by assets values and liquidity of assets
- Strong free cash flow if capital expenditure is curtailed
- Equipment depreciation rate and disciplined supply of new equipment result in relatively quick re-balancing of supply/demand
- Improving utilization drives earnings growth
- Surplus cash utilized to buy back bonds and equity
- Stock trading at 12¢ versus net assets backing of 47.5¢
Where did it go wrong?
- Management change post our investment
- Utilization restored but at the cost of margins
- Cost control/reduction not the number one priority when it should have been
- Diversifying acquisition at the wrong time and wrong price
- Acquisition used most of the surplus cash as well as substantial issuance of shares
EBITDA and margins & Utilization
- Acquisition in non-core business with no synergies
- Fully valued price of 8-10 times EBIT
- Issuance of 15% of Emeco shares at severely depressed prices
- Use of surplus cash that could be better used to buyback bonds and/or equity
Black Crane Response
- Activist campaign to stop the acquisition and change the Board
- Focus on capital management and potential industry consolidation
- Public letter to the Chairman clearly outlining our opposition to the acquisition. Letter jointly signed by Black Crane and one other shareholder with a combined stake of 24%
- Company announces delay to the acquisition but remains committed to continuing
The West Australian
Emeco buys time to talk up Rentco deal
1 April 2015
Dissident Emeco Holdings shareholders say a month-long delay in the proposed $53 million purchase of a WA truck rental business has given them more time to scuttle the deal.
In its first public statement since opposition emerged two weeks ago, Emeco’s under-pressure board yesterday reaffirmed its backing of the acquisition of Bob and John Shier’s Rentco Transport Equipment Rentals.
Angry shareholders, led by two institutional investors, claim at least 35 per cent of the mining equipment supplier’s register reject the transaction and may still push to spill the board.
Emeco said buyer and seller had agreed to push back completion of the purchase to April 30 to satisfy outstanding conditions.
“The Emeco board has confirmed its full support for the Rentco acquisition as a key move under the group’s strategy to diversify and create a more resilient business,” the contractor said. “However, the board is engaging in discussions with shareholders who have raised issues with a view to addressing their concerns.”
The push against the deal struck by Emeco managing director Ken Lewsey has been led by 7 per cent shareholder Black Crane Capital and First Samuel, which has a 17 per cent stake.
Black Crane managing partner Peter Kennan said there had been several discussions with Emeco.
“Having the delay is useful from our perspective,” Mr Kennan said.
“Our objective is still to see whether we can convince management and the board that this is not in shareholder interests.
“We haven’t spoken to one single shareholder who thinks it’s a good idea. Most shareholders we’ve spoken to are completely perplexed how they can even contemplate this.”
The next move could come “within days”.
Including debt, the Rentco deal has an enterprise value of $82 million. The deal is worth up to $76 million for the Shiers.
The dissidents object to issuing $11.4 million in Emeco shares to the Shiers at the historically low price of 12.6¢ a share.
Stay tuned for the next round….
See full slides below.