While I was on vacation at the end of February Emeco released their results for the first half of fiscal 2014, and they also announced that they are planning to refinance their debt by offering US$360 million in senior secured notes and by establishing an A$75 million revolving credit facility. A successful debt refinancing will mean that the company doesn’t have to worry anymore about meeting their current debt covenants, but I do think that the fact that they are looking to refinance is slightly negative. Their current average debt maturity was more than 4 years; you only refinance that because you are forced to. At the same time it’s of course good that they are able to refinance.

The latest results weren’t very good, but it wasn’t a disaster either. Since Emeco is at this point in time mostly a bet on liquidation value one of the most important things to track is how much money the company is receiving for the idle equipment that they are selling, and for the first time since 2009 they sold a bunch of equipment for a significant loss:

With the company trading at two-thirds of adjusted NCAV (see my original write-up for details) this discount still implies significant upside in a liquidation scenario. If we discount all their equipment by 20% the implied value is A$0.43/share, almost twice the current market price. And fully liquidating the company is not really what we want to see. We just want them to sell the idle equipment to manage their debt level: the equipment that is in use is generating plenty of cash flows.

In the second half of FY 2014 they have increased the amount of asset disposals significantly with US$35.1M in sales in just two months time, but based on the information provided in the conference call this was also done at a slightly higher discount. Most of the disposals were however done in the Indonesian business segment where the company has a zero utilization rate, and while mining equipment can be used world wide, shipping it isn’t free. I think their equipment in other parts of the world is probably slightly more valuable.

In the conference call the CEO also indicates that they have a number of sizable deals lined up, and that they think they could generate between A$90 million and A$100 million in cash from asset disposals in the second half of FY 2014 if they have to. So while the company continues to struggle (expected EBITDA for FY 2014 was revised downwards from A$90~105 million to A$82~94 million) I think the thesis is still intact: the value of their equipment is sufficiently high to manage their debt load and wait for better times.

Disclosure

Author is long Emeco Holdings