state infrastructure booming, page-7

re: now housing back on the rise **Merrills Sees 31% Potential Upside In National Hire**
April 04 2005

The analysts at Merrill Lynch have initiated coverage on equipment rental company National Hire (NHR) with a Buy, High Risk recommendation, while highlighting significant potential upside.

Recent acquisitions have been company transforming events, the analysts say, improving the company’s industry and market positions, and this is only the beginning, according to Merrill Lynch.

"We believe the story is far from over with NHR leveraging its new relationship with global heavy equipment provider Caterpillar," as well as a large scale capex expansion in branch rollout and product range.

As such the analysts expect to see "spectacular EPS growth," forecasting a rise of 58% in FY06 and 20% in FY07.

The stock is seen as trading at an excessive discount to the market and the analyst highlight their conservative target of 49c would still provide an expected return of 31%.

A successful merger integration and delivery on FY05 guidance are expected to deliver a re-rating for the stock.


***The Only Way Is Up For National Hire***
April 08 2005

On April 1, Merrill Lynch initiated coverage of previously non-descript equipment hire player, National Hire Group (NHR), with a Buy recommendation. This was no joke.

Under the heading of "Earnings CATapulted", Merrills provided a report on a very astute player set to cash in, in no uncertain terms, on the current resource boom and the subsequent desperate need for heavy construction and mining equipment.

National Hire is a company transformed.

Founded in 1981 and listed in 1997, National previously comprised of 18 branch locations on the eastern seaboard which nibbled away, along with countless others, at the dominant market share of the market heavyweight, Coates Hire (COA).

In March 2004, National placed $25m of equity with Caterpillar equipment supplier WesTrac, representing 60% ownership, and allowing the company to be re-branded as "National Hire, the Cat Rental Store" in NSW and the ACT.

In December 2004, National made two further acquisitions - the Cat Rental Store in WA, and Allight P/L – via the issue of $112 in new equity to vendors WesTrac and Allight Minorities. Further funds were raised through an institutional placement of $40m.

WesTrac is an unlisted company principally concerned with the operation of Caterpillar dealerships in WA, NSW and the ACT. WesTrac indirectly belongs to Kerry Stokes, otherwise known as the major shareholder in Channel Seven (SEV).

Allight specialises in both hire and sale of mobile lighting equipment, power generation equipment and de-watering pumps in WA and Queensland. It is also the sole Australian distributor for Caterpillar power generation sets and diesel engines.

I think you can see where this is heading.

The Australian Bureau of Statistics (ABS) estimates the plant and equipment hire industry in Australia to be worth about $2.6 bn. Products for hire are largely skewed towards the construction and mining sectors. Although hirers range from large miners to DIY enthusiasts, 30% of equipment is leased for one year or more.

WA and Queensland represent 50% of all sales, and the mining industry accounts for 31% of all sales. National’s December acquisitions have bumped the company up from a 2% market share player, in a field of about 1500 entrants, to a 7% player. Consequently, National Hire is now Number Two behind Coates (17%).

National has also significantly expanded its hire fleet through its acquisitions, providing a much wider array of products for hire. This not only allows access to new customers for potential cross-sales, but also allows the company the capacity to bid on national tenders.

Using a mix of debt, internal cash flow and funds raised via the $40m placement in December, National is currently half way through a $75m capital expenditure program mostly aimed at expanding its product range across all three business divisions, those being its stand-alone business, and its newly-acquired Cat Rental Store WA and Allight businesses.

National anticipates both the delivery and expected revenue phasing of the new products to the company to be 100% complete by June this year.

This is critical, says Merrill Lynch, in delivering on the company’s forecasts, given return on capex (capital expenditure) accounts for 60% of revenue increase in FY05. Management has re-affirmed both phases - delivery and revenue - are running on track.

National has made further, smaller bolt-on acquisitions in recent times, acquiring NSW Central Coast hire company Beeline Rentals in December, and Newcastle and Hunter regional player Beavis Hire in March.

Merrills expects full-year contributions from all announced acquisitions, as well as further branch rollouts, to play a significant part in National’s revenue growth, accounting for increases of 27% in FY05 and 47% in FY06.

FY05 will also see a large lift in margin, highlighting the benefit of increased scale and fixed cost leverage, Merrills reports. The analysts expect gross margin lifts to be driven by new stores, the rollout of newly acquired equipment, and some reduction in sales and marketing costs as a percentage of total sales.


Importantly, says Merrills, in providing guidance for FY05 the management has maintained a conservative stance on equipment utilisation rates. Depending on equipment type, utilisation rates presently run at between 45 and 80%. Management has factored in no increase to these figures.

Both the Cat Rental Store and Allight brands have strong recognition, says Merrills. This is notwithstanding the obvious brand recognition of Caterpillar itself. Name me another bulldozer maker.

Merrills believes National will benefit from further rollouts and branch expansion to the "Cat" dealerships. Through WesTrac, National now has both preferential pricing and priority access on Caterpillar product for inclusion in its hire fleet.

The Cat Rental Store WA presently carries in excess of 900 products of which 70% are Caterpillar brand. There are currently 8 stores spread across the state, including stores in Perth and Kalgoorlie. More than 60% of the business comes from the mining industry, and of the 800-odd customers, the top ten account for 26% of revenue.

It is a very high margin business, Merrills reports, with margins in excess of 50% of EBITDA reflecting a low fixed cost base and the long term nature of hire contracts.

The purchase of the business in December, via a $47m equity issue to WesTrac, translates to an acquisition multiple of 3 times FY05 EBITDA, the analysts calculate. The continuing relationship with WesTrac will see the company providing National with repair and maintenance, while also providing an avenue for the disposal of old stock.

Nevertheless, the hire fleet is still relatively young at an average of 1.5 years. This will assist in greater customer satisfaction and lower maintenance and repair costs.

The Cat Rental Store WA will account for 18% of FY05 pro-forma EBITDA, the analysts report.

The acquisition of Allight further increases National’s exposure to the mining sector, most specifically in the stronger growth states of WA and Queensland. Value in the Allight brand is enhanced by Allight’s aforementioned sole Australian distributorship for Caterpillar power generation sets and diesel engines.

Equipment hire accounts for 40% of the business, while sales account for 60% – predominantly in power generation products. There are presently 14 Australian branches as well as a fully-owned subsidiary in Indonesia. WA provides 34% exposure, and Queensland 25%.

Allight’s customers represent engineering and construction sectors, as well as mining, although mining customers provide in excess of 40% of revenue. Allight presently boasts more than 800 customers, with no one customer individually exceeding 6% of revenue.

The purchase of Allight translates into an acquisition multiple of 4.4 times FY05 EBITDA, the analysts report. Allight will account for 30% of that EBITDA.

The analysts expect National to use its improved size and financial strength to act as an industry consolidator, thereby further boosting its market position while adding further growth.

The strength in the Australian domestic construction cycle over the last 2.5 years has been well documented, Merrills suggests. While housing has now entered a downturn, the outlook for both non-residential and engineering construction remains solid. Add mining projects and you have the key exposures for National Hire.

BIS Shrapnel’s January 2005 update for the broader construction market suggests that the value of work will be upgraded every year from now to FY09. While previously forecasting a reduction in activity in FY08 and FY09, BIS Shrapnel now believes any reduction would be less severe than first expected.

Merrills believes this reinforces its view that peak cycle earnings for National are at least two years away. Moreover, the current high level of skill shortages has the potential to add upside risk by smoothing out the cycle over FY08 and FY09, the analysts suggest.

The analysts are forecasting "spectacular" EPS growth of 58% in FY06 and 20% in FY07. Presently, National trades at excessive discounts to both the market and its major competitor, Coates. They believe this is unjustified given the two year gap before peak earnings and National’s stronger growth profile relative to Coates.

The analysts have set a price objective of $0.49 per share, which is calculated as 31% of expected total return and derived from Price/Earnings and Discounted Cash Flow assumptions which the analysts suggest to be conservative.

They believe that successful delivery on both earnings guidance and merger integration at the FY05 result is the key catalyst to closing the discount.

It is the opinion of many in the market that ancillary businesses which derive their income indirectly from mining and construction are presently "must have" portfolio additions. National Hire appears to be a potential star amongst this group.