Macquarie tips 16% upside for this ASX small-cap stock

The ASX small-cap stock Emeco Holdings Ltd (ASX: EHL) could be one of the most exciting names to invest in right now, based on what broker Macquarie is predicting for the business.

Macquarie describes Emeco as providing heavy equipment rental solutions and contract mining primarily for the mining industry. It has three different segments: rental, Pit n Portal, and workshops.

The rental segment provides earthmoving equipment to customers in Australia. Pit n Portal includes a range of mining services and related services in Australia. Workshops provides maintenance and component build services in Australia.

Let’s get into what’s appealing about the business.

What’s the appeal of the ASX small-cap stock?

Macquarie was pleased with the recent trading update from the business, which showed “solid momentum” as the business enters FY26 with a strengthened balance sheet.

The company is expecting “moderate earnings growth, significant free cash flow and substantial deleveraging”.

Macquarie forecasts the business could grow its operating profit (EBITDA) by 6% to $319 million in FY26.

In the update, Emeco’s FY26 guidance was largely unchanged, apart from the depreciation range being lifted to between $165 million to $170 million, up from $160 million to $165 million previously.

The broker noted that the ASX small-cap stock remains focused on improving the return on capital (ROC), targeting 20%. It finished FY25 with a ROC of 17% and the current run-rate is around 18%. The company is also focused on converting earnings into free cash flow.

Macquarie believes sustained equipment utilisation and operational improvements remain critical.

The broker pointed out that in FY26, Emeco will drive cost efficiencies and increase its focus on business development to support higher utilisation, expand market share through new project opportunities, and grow fully maintained projects through the Force business.

How is the mining industry performing?

As a business heavily involved in serving the mining industry, Emeco’s success is partly linked to the performance of the sector. Macquarie commented on the sector as a whole:

The outlook for FY26 remains positive. Australian mining production volumes are expected to remain buoyant, supported by continued demand for commodities. In particular, bulk commodities is forecast to remain robust (iron ore and coal), driving demand for large mining equipment and rental solutions. Strength in the gold sector, where EHL’s rental and maintenance solutions can drive improved production and returns for clients, also presents growth opportunities for the company.

How attractive is the ASX small-cap stock’s valuation?

Macquarie identifies several potential catalysts for the business, including ongoing deleveraging, margin improvements, generating free cash flow to reduce outstanding debt, and potential capital management initiatives (such as dividends and share buybacks). It’s expecting a capital management update after refinancing its debt facilities.

The broker has a price target of $1.40, implying a potential 12-month rise of 12% from its current level, as well as a possible annual dividend of 5 cents per share, which equates to a dividend yield of 4%. That implies a possible total return of 16% over the next 12 months.

The post Macquarie tips 16% upside for this ASX small-cap stock appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Macquarie Group. The Motley Fool Australia has positions in and has recommended Macquarie Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.