Element Fleet Management Corp.

Element Fleet Management Corp. (TSX: EFN) offers fleet management company. It provides vehicle fleet leasing and fleet management solutions and related service programs to international companies in a wide variety of industries. The group has its operations across the major geographies like the US, Canada, Mexico, Australia and New Zealand.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, EFN declared its quarterly result, wherein net interest income and rental revenue stood lower at CAD 200.32 million as compared to CAD 236.01 million in Q1FY19. The decline was primarily attributable to a weak performance from both Fleet Management and Non-Core segments. Net revenue stood at CAD 247.24 million, as compared to CAD 242.22 million in pcp, due to a lower interest expense and higher servicing income. Net income for the period stood at CAD 79.36 million, as compared to CAD 80.47 million in Q1FY19. The quarter was marked by lower operating expenses driven by a decline in salaries, wages and benefits. Total earning assets stood at CAD 11,999.63 million, as compared to CAD 13,141.27 million in pcp. Cash balance at the end of Q1FY20 stood significantly higher at CAD 90.84 million, as compared to CAD 24.22 million in FY19.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: Price/ BV Multiple Based Relative Valuation (Illustrative)

Price to Book Based Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Refinitiv (Thomson Reuters), NTM: Next Twelve Months

Stock Recommendation: The company has a well-diversified premium client base, which ensures higher credit quality and lower risk. The company is well-equipped to weather the short-term challenges arising from the current downturn and is capable of taking advantage of upcoming opportunities once the economic conditions stabilize. The group finds COVI-19 as an opportunity to increase the relationship with the clients and expects lesser clients are going to change their fleet management service provider. The group has ~98% of client retention ratio. Higher retention ratio ensures stable cash flow and income. The group expects that more business would be outsourcing their fleet-related services to save cost, which is likely to benefit the company. The group also expects higher demand from "mega fleets" as retailers identify online home delivery as a major ‘game-changer’ in coming days as working from home and social distancing is likely to be societal norms in the near term. The stock corrected ~38% so far this year, and we believe the current trading levels offers a good entry point. We have valued the stock using Price to Book value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered CI Financial Corp, Genworth MI Canada Inc and IGM Financial Inc, as peers. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 8.20 on May 20, 2020.

EFN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

WSP Global Inc.

WSP Global Inc. (TSX: WSP) offers several professional services like engineering and design to a wide range of clients across the Transportation & Infrastructure, Property & Buildings, Environment, Power & Energy, Resources and Industry sectors, as well as offering strategic advisory services.

Q1FY20 Financial Highlights: For the quarter ended March 28, 2020, WSP declared a top-line growth while failed to continue the momentum in its bottom line. Revenue stood at CAD 2,210 million, improved from CAD 2,173.6 million in pcp. The increase was driven by a decent growth from the public sector segment, while lower income from private sector remained a drag. Earnings before net financing expense and income taxes stood lower at CAD 88 million, as compared to CAD 95.9 in Q1FY19, due to higher personnel costs and an increase in other operational costs. The quarter was marked by higher net finance expense, primarily due to a significant rise in long-term debt, resulting in a profitability-hit. Net earnings stood at CAD 14.3 million, as compared to CAD 62 million in pcp. The Board of Directors declared a quarterly dividend of CAD 0.375 per share, payable on July 15, 2020.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): EV/Sales based Valuation

Note: All forecasted figures and peers have been taken from Refinitiv (Thomson Reuters), NTM-Next Twelve Months

Stock Recommendation: The stock of WSP stood resilient amidst the current volatility in the broader market due to the ongoing COVID 19 pandemic. The performance of the company has been dampened by ongoing weakness from the oil and gas industry from the operation located in Western Canada. The company’s operations were further impacted by a soft performance from Asia while the company reported its organic revenue growth in line with the Management’s expectations. The company reported a backlog of CAD 8.5 billion, increased 4% from q-o- basis, due to higher organic order intake. These backlogs are equivalent to 11.1 months of revenue when compared to trailing twelve months. The company has ample liquidity of CAD 1.2 billion of available short-term capital resources along with a net debt to adjusted EBITDA ratio of 1.3x, however rising debt might pose a concern. We have valued the stock using EV/Sales -based relative valuation method and considered SNC-Lavalin Group Inc (TSX: SNC), Stantec Inc (TSX: STN) and Badger Daylighting Ltd (TSX: BAD) etc., as peer group arrived at a target price offering a  single-digit upside (in % terms). Hence, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 89.24 as on May 20, 2020.

WSP One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.