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Eqstra: ‘one to watch for the punters’

Shares jump as company exceed profit expectations but debt needs to be watched

Shares in JSE-listed industrial group Eqstra Holdings jumped 17.8% or 58c in Tuesday trade as the company came in with a strong first half operating performance.  

The company closed the day at R3.84 per share.

The leasing firm of mining equipment said its headline earnings per share increased 5.7% to 36.9 cents in the six months to end December as the results from its divisions, including contract mining and plant rental improved.

“All three of its divisions reflected improvement,” said Rabi Thithi, an analyst at Avior Capital Markets in an interview with Reuters. 

Thithi added:  “First bit of good news on the counter in a very long time. Good results plus a potential corporate action play makes Eqstra an interesting one to watch for the punters.”

Net asset value for the share rose 8.6% to R8.77 per share and the operating profit improved 9.1% to R503m. 

One of the areas which has under performed for Eqstra was the contract mining sector but management told shareholders: “Contract Mining and Plant Rental remains an important part of the asset mix of the group. The re-positioning of the division has already starting to show early signs of recovery under new management. The exit of underperforming contracts and improvement of asset utilisation positions the division adequately through the commodity cycle. Management continues to reduce the exposure to contract mining not exceeding 30% of the group’s revenue-generating assets. We continue to actively participate in the South Africa render activities, but redeploying surplus assets could however be challenging.”

While the performance pleased the market, investors should remember that a key concern for analysts watching Eqstra is the company debt levels. Back in September 2014, stockbrokerage Imara SP Reid warned shareholders of Eqstra that: “We believe the most detrimental factor for Eqstra is the debt as, with a net interest bearing debt to equity ratio of 2.3x, it will incur large debt repayment costs. Currently net finance costs (R609m) account for approximately 69% of profit before net financing costs at R872m ( i.e. interest cover is a low 1.45x). With the current debt (R7.9bn) and profit (R251m), repayment will take many years unless returns are improved without more debt being raised. A capital raise of R250m is planned through a private placement.” 

Eqstra did however point out: “The Rating Agency Standard & Poor has not issued an updated ratings report since April 2013 when Eqstra’s long-term credit rating was downgraded by one notch to BBB+ based on the agency’s view that the group is exposed to the cyclical mining sector, subject to volatile commodity prices and labour unrest. The agency is in a process of completing their annual review and will issue an updated report shortly” 

For now shareholders can be satisfied with the interim operating performance.

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