Element Fleet Management Corp.

Resilient Second Quarter Results: Element Fleet Management Corp. (TSX: EFN) is a global fleet management company, which provides management services and financing for commercial vehicle and equipment fleets. As on 30 July 2020, the market capitalization of the company stood at ~CAD 5.09 billion.

Quarterly Performance (For the Period Ended 30 June 2020): The company has recently released its results for the second quarter ended 30 June 2020, wherein it reported an adjusted operating income of CAD 111 million. This represents a CAD 0.02 per share decline from Q2 2019, reflecting shelter-in-place edicts reducing clients’ vehicle activity levels, delayed originations due to OEM facility closures and declining syndication revenue yield. During the quarter, free cash flow was CAD 0.25 on a per share basis. In the same time span, EFN reported assets under management of CAD 17 billion and has issued USD 750 million of vehicle management asset-backed term notes to pay down outstanding variable funding notes. During the quarter, the company won new business, including self-managed fleets, and renewed and retained large existing clients. The credit performance of the company was robust with strong receivables collection, no change in the balance sheet allowance for credit losses and a decline in delinquencies.

Quarterly Financial 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 Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: While there may be a few near-term bumps and detours, the growth plan of the company will take it on the next leg of its journey. 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. As per TSX, the stock of EFN is moving towards its 52-weeks’ high level of CAD 13.48 but retains potential for further growth. The stock of EFN gave a return of 13.34% in the past three months and a return of over 14.91% in the last one month. We have valued the stock using the price to earnings multiple based illustrative relative valuation method and have arrived at a target upside of higher single-digit (in percentage terms). For the said purposes, we have considered Intact Financial Corp, ECN Capital Corp, CI Financial Corp etc. as peers. Considering the current trading levels, decent returns in the past one month, resilience in performance and growth opportunities, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 11.64, up by 3.9286% on 30 July 2020.

EFN Daily Technical Chart (Refinitiv, Thomson Reuters)

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