Emeco Holdings Ltd (ASX: EHL) released FY19 guidance and an operating update this morning, sending the share price more than 19% higher.

About Emeco

Founded in 1972, Emeco rents out mining equipment and machinery to companies and contractors mining coal, gold, copper, bauxite and iron ore. The total rental fleet is close to 1,000 machines.

Emeco also provides maintenance services through its subsidiaries Force Equipment and Matilda Equipment.

FY19 Guidance

The share price has risen today in response to new FY19 guidance, which shows that Emeco now expects operating EBITDA to be between $211 million and $213 million, an increase of nearly 40% year-on-year (click here to learn what EBITDA means).

The company also expects an EBITDA margin of 46%-47%, up from 40.2% in FY18, and a return on capital of around 20%, similar to FY18.

The update also shows that Emeco’s fleet may last longer than the average Australian machinery fleet. The average age of Emeco’s vehicles in hours is 26,500 compared to the Australian average of 37,200.

Looking Ahead – FY20

Emeco states that “market conditions continue to be positive and outlook for FY20 remains strong, with total material movement continuing to increase and equipment supply remaining tight”.

A recent purchase of high-utilisation assets is forecast to generate an additional $25m EBITDA in FY20.

A priority for the company heading into FY20 is deleveraging, with leverage forecast to be 2.1x by the end of FY19 as calculated by Net Debt/Operating EBITDA, and only 1.0x by FY21.

The deleveraging is expected to be achieved through stronger cash flows and refinancing of existing debt.

Summary

Emeco is looking at a positive FY19 annual report and the deleveraging strategy should serve them well over the longer term. However, aggressive deleveraging may also restrict funds available for productive investment or dividends. The company does not currently pay dividends but says the option will be considered once the existing debt has been refinanced.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).

Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.