Element Fleet Management Corp

Element Fleet Management Corp (TSX: EFN) is a global fleet management company that is also engaged in financing for commercial vehicle and equipment fleets.

Key Highlights

• The bullish stance of management: The management stated that they have completed the transformation in 2020 and begin to focus on strategic priorities for 2021 and beyond. The group is aggressively pursuing organic growth in all the geographies. The company is targeting 4-6% annual organic revenue growth, which would result into high single-digit to low double-digit annual operating income growth. The company is targeting to achieve a high single-digit to low double-digit growth in free cash flow.

• Increase in dividend: In 3Q 2020, the company paid a dividend of CAD 0.045. The group has increased the common dividend by 44%, from CAD 0.18 to CAD 0.26 annually per share.

• Receivables back to pre-COVID-19 levels: The company managed to bring down their impaired receivables balance to CAD 34 million, decreased by 69% as compared to CAD 78 million in Q2 2020, and this improvement is parallel to pre-COVID-19 levels.

• Robust performance: With cumulative CAD 189 million of operating income improvements as of Q3, the company has surpassed the CAD 180 million end goal of its transformation program, three months ahead of schedule. Under this transformation programmes, the company aims to bring down the operating expenditure.

Source: Company

Financial Overview for 3Q 2020

Source: Company

• The company posted net revenues of CAD 243.2 million, increased 8% in 3Q 2020 compared to CAD 225.5 million in the previous quarter, as all three segments of revenue have shown growth.
• The company reported adjusted operating income to CAD 129.0 million in 3Q 2020, an increase of 16% as compared to CAD 111 million in the previous quarter, primarily due to a rise in revenue.
• Adjusted operating income attributable to common shareholders increased by 17% to CAD 96 million in 3Q 2020 compared to CAD 82.4 million in the previous quarter.
•  The transformation has improved operating leverage and increased free cash flow for the company.

Source: Company

Risks associated with investment

Some of the risks include adverse economic conditions which may decrease the estimated value of the collateral securing loans and leases. COVID-19 pandemic could lead to financial losses in the company's portfolio and a decrease in their net income and book value. Any of these events, or any other circumstances caused by turmoil in world financial markets, may have a material adverse effect on the business and financial condition.

Valuation Methodology (Illustrative): Price to Book Value

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company has started witnessing steady recovery across most of its operational areas, with transaction volumes approaching or back at pre-COVID levels. The transformation programme ran by the company is giving fruitful results. Further, the management is bullish on the company’s prospect. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ recommendation at the closing price of CAD 13.19 on November 24, 2020. We have considered Intact Financial Corp, Trisura Group Ltd, ECN Capital Corp, etc. as the peer group for the comparison.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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