Element Fleet Management Corp. (TSX: EFN) is a leading fleet management company, which provides world-class fleet management services that empower extraordinary results across the total fleet lifecycle. The company's suite of fleet management services deals with acquisition and financing, to program management and remarketing. 

Key Updates:

• Highly leveraged balance sheet: The company has a high D/E ratio of 2.76x on Q1FY22, as compared to the industry median of 1.03x. A higher D/E is an alarming sign and would hinder the financial flexibility of the company. Long-term debt to total capital stood at 70.1% in Q1FY22, as compared to the industry median of 7.82x, which indicates higher balance-sheet risk, and remains a major concern.

• Elevated Cash conversion period: The company reported its cash conversion period of 1,528.5 days in Q1FY22, which is considerably higher than the industry median of 36.4 days. A higher cash conversion period denotes that the company is lagging and takes higher time to convert its investments to cash flows.

• Rise in input costs: In Q1FY22, the company posted a surge in its input costs due to a rise in Salaries, wages & benefits expense coupled with a higher General & administrative expense. Due to this, the company reported adjusted operating expense of CAD 117.9 million, higher than CAD 111.2 million in pcp. Continuation of the above trend might dampen the company’s profitability and margins.

Stock Recommendation:

For FY22, the company expects its revenue to increase by 4-6% over FY21, while its operating margins are expected to improve in the range of ~52.5-53.5% during the same period. Moreover, the management anticipates a 9-14% y-o-y growth in the adjusted EPS to CAD 0.92-0.96 per common share for FY22. On the flip side, the stock corrected ~12% and ~14% in the last six months and nine months, respectively. Moreover, the stock of EFN is available at an EV to Sales multiples of 4.3x on NTM basis, higher than the industry (Financials) median of 2.9x. Hence, considering the aforesaid facts, we give a ‘Watch’ rating on the stock of EFN at the last closing price of CAD 12.21 on May 10, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing

One-Year Technical Price Chart (as on May 10, 2022). Source: REFINITIV, Analysis by Kalkine Group

Investors can evaluate the stock based on the support and resistance levels provided in the report in case of keen interest taking into consideration the risk-reward scenario.

  Technical Analysis Summary

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