what is the medium term target, page-56

Last Traded: $0.165 Market Cap: $104M Sector: Industrials
Summary of ACCUMULATE / MARKET PERFORM Valuation: $0.77
report dated
22/01/09
What’s new?
EHL will be one of the first mining services companies impacted by a mining slowdown
because:
�� initial rental contracts are on average only nine months in duration,
�� much of the swing capacity that EHL supplies to large customers (who represent
60% of Australian rental revenue) can be cut,
�� small customers (who represent 40% of Australian rental revenue) may cease or
cut back production given they are usually higher on the cost curve and may also
struggle with debt financing, and
�� part of EHL’s fleet is deployed in mine development, which will be pulled back at
least in the short term.
Utilisation of fleet and therefore profit margins will decline as a result. However, the
appeal of EHL’s rental model increases (especially to smaller customers) when there
are capital constraints, which will provide some earnings offset.
Impact
EPS has been revised down by 15.0% in FY09, 31.6% in FY10 and 28.0% in FY11.
The FY09 NPAT forecast of $68.7m is now below management guidance of $75-81m.
CommSec’s DCF valuation is $0.77 (down 48 cents). The reduction reflects the
earnings revisions and a higher WACC (increased to 11.4% from 10.0%) as the risk to
cash flows has increased.
Outlook and investment view
On both absolute and relative valuation metrics EHL looks cheap. For example EHL is
trading on an FY10 PE multiple of only 2.1x. On consensus estimates it is trading at a
58% discount to the mining services average. CommSec argues that some discount is
warranted given EHL’s higher than average risk profile, however this discount appears
excessive.
With further bad news expected across the sector in the short term and EHL’s earnings
risk, CommSec retains an ACCUMULATE / MARKET PERFORM call pending further
management commentary at the 1H09 result (25 February 2009).



Comsec Report