Element Fleet Management Corp.

Element Fleet Management Corp. (TSX: EFN) is a global fleet management company, which provides management services and assistance for financing commercial vehicle and equipment fleets.

Recently, the company informed the exit of Executive Vice President and Chief Financial Officer Vito Culmone in early 2021.

The group informed that it had redeemed its full Series G shares on September 30, 2020, in order to reshuffle its capital structure by eliminating the most expensive preference units. By the redemption of 6,900,000 issued and outstanding Series G Shares, the company would reduce the cost of equity and would enhance operational efficiency in the coming days.

Q2FY20 Financial Highlights: EFN reported its quarterly numbers, wherein the company reported net revenue of CAD 225.503 million, lower than CAD 247.239 million in the previous corresponding period (pcp). The quarter was marked by higher financing revenue, a decline in the servicing income, net and a significant fall in the syndication revenue. The business witnessed reducing clients’ vehicle activity levels, delayed originations due to OEM facility closures and declining syndication revenue yield.  Adjusted operating income stood at CAD 111.144 million, lower than CAD 129.322 million in pcp. Adjusted operating expenses stood at CAD 114.359 million, against CAD 117.917 million in pcp. The company reported net income of CAD 58.594 million, as compared to CAD 79.358 million. The company reported an AUM of CAD 17 billion, reflecting a growth of ~10% from Q2FY19. The company reported new order wins, which includes self-managed fleets and renewed and retained large existing clients, during the second quarter of FY20.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks and uncertainties including the risks related to COVID-19 pandemic, risks regarding the fleet management and finance industries, economic factors, risks related to the payment of dividends, risks related to business integration.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: The stock of EFN gained ~31% in the last six months. The company retains decent fundamentals and is transforming the core platform and is rapidly de-leveraging the balance sheet. The company has entered 2021 with a better organizational culture and is more client-centric, agile, entrepreneurial, engaged, and curious. With the redemption of Series G Shares, the company has eliminated more than CAD 1 billion hybrid instruments from its capital structure, which had a higher cost of equity, a key positive as it would lead to operational efficiency. The company has a premium client base, and company reported decent organic growth underpinned by providing industry-leading services within the global cable, transmission and substation servicer. The company is focusing on expansion plans to be one of the leading deliveries and logistic services companies across Mexico. We have valued the stock using the Price to Earnings based relative valuation approach and arrived at a target price, which suggests a single-digit upside potential (in % terms). For the said purpose, we have considered peers like Intact Financial Corp, Trisura Group Ltd etc. Hence, considering the aforesaid facts and current price movement, we recommend a 'Hold' rating on the stock at the closing market price of CAD 11.21 on October 2, 2020.

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

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