Element Fleet Management Corp.

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.

Key Highlights:

• Issuance of Senior Notes: Recently, the company announced that it had issued 1.60% Senior Notes amounting to USD 500 million with the maturity date of April 06, 2024. The proceeds from the notes would be utilized for the working capital and for general corporate purposes.
• Collaboration with Aryo: The company reported its agreement with Aryo, an EV vehicle company, with a range of products starting from light-duty truck, van, and flatbeds to three-wheel vehicle configurations. Moreover, Aryo offers next-generation EVs having efficient ergonomics in terms of fossil fuel vehicles. This would allow EFN’s clients to buy AYRO vehicles to benefit from Element’s offerings like financing, cost savings, driver safety, and reduced environmental impact.
• Robust Margin: The company showcased a strong margin profile and reported a higher margin than the industry median. Gross margin and EBITDA margin stood higher at 81% and 51.3%, respectively, in Q4FY20, as compared to the industry median of 51.3% and 30.4%, respectively.

Source: Refinitiv (Thomson Reuters)

• Result Update: The company would disclose its Q1FY21 result on May 11, 2021.

FY20 Financial Highlights:

• EFN announced its full-year result, wherein the company posted net revenue of CAD 963.093 million, v/s CAD 994.102 million in FY19. The increase was driven by higher net financing revenue (CAD 405.687 million v/s CAD 411.180 million in FY19).
• Operating expenses were reported at CAD 502.876 million, decreased from CAD 512.192 million in FY19, due to lower salaries, wages and benefits and amortization of convertible debenture discount costs, partially offset by higher share-based compensation costs and a slight increase in general and administration expenses.
• Net income for the year stood at CAD 287.092 million, significantly higher than CAD 97.701 million in FY19. The surge was aided by the inclusion of Impairment on 19th Capital expense amounting to CAD 260 million in FY19.

FY20 Income Statement Highlights (Source: Company Report)

Risks: Due to the imposition of restriction on account of the second wave of virus, the group might witness a decline in the estimated value of the collateral loans and leases. This might impact the company’s overall performance.

Valuation Methodology (Illustrative): Price to Book based

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

The company confirmed the completion of its transformation program, which resulted in CAD 208 million of run-rate profit improvements and delivered CAD 133 million of operating income growth during the year 2020. Moreover, the adjusted operating income margin has remained elevated during the last few quarters.

Source: Company Presentation

We have valued the stock using the P/BV 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 ECN Capital Corp, Canadian Western Bank etc. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 14.30 on April 20, 2021.

Price Chart (as on April 20, 2021). Source: Refinitiv (Thomson Reuters)

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