Stiff Correction in Stock Price, Downside seems to be Capped: ECN Capital Corp. (TSX: ECN) is a leading business service provider to financial institutions in the United States. The company owns a portfolio of business services providers that operate under a fee-based, asset-light model through which it leverages highly specialized expertise, industry knowledge, regulatory compliance and strategic relationships. The Group managed and advised assets of US$ 34 billion and operates through three operating segments, namely Service Finance, Triad Financial Services and The Kessler Group.

Recently, the Company confirmed its largest bank funding commitment with one of its bank partner via its operating subsidiary ‘Service Finance’. Under the commitment the partner will be purchasing up to US$600 million in Service Finance prime and super prime retail installment contracts. The contracts are related to home improvement projects and spreading across 50 states.

The Group paid a quarterly dividend of US$ 0.025 per share, higher from US$ 0.02 per share on the previous corresponding quarter.

Q4FY19 Financial Highlights: ECN declared its quarterly result, wherein the Company reported total revenue of US$ 65.99 million, lower from US$ 67.38 million in the pcp. The decline was due to lower contribution from interest income and other revenue.Adjusted operating income before tax came in at US$ 26.25 million, improved from US$ 24.59 million in Q4FY18, majorly supported by lower interest expense. Net income from continuing operations stood at US$ 12.10 million, as compared to a loss of US$ 2.41 million in Q4FY18,thanks to lower corporate restructuring & transition costs.

Q4FY19 Income Statement Highlights (Source: Company Resource)

Valuation Methodology (Illustrative): Price/BV Based Methodology

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

Stock Recommendation: The stock of ECN slumped ~30% in the last three months. Though the company’s performance is closely tied with the state of the economy, it operates a business which has high barriers to entry. Further ECN Capital manages and advises on credit assets including loans and credit card portfolios, the demand for which is likely to remain stable in the coming quarters. Also, the company’s specialized business model enables it to partner with financial institutions like banks and life insurance companies rather than competing with them which is a tailwind. Moreover, the considerable decline in the company’s stock price implies that the negatives are already priced. We have valued the stock using P/BV based relative valuation method and considered industry (Banking Services) median on NTM basis. We have arrived at a target price offering higher double-digit (in % terms) upside potential. Hence, we recommend a ‘Speculative Buy’ on the stock at the closing market price of CAD 3.65 as on 28 April 2020 closing price.

ECN One-Year Daily Price Chart (Source: Thomson Reuters)

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