Element Fleet Management Corp.

Element Fleet Management Corp. (TSX: EFN) offers fleet management company. It provides vehicle fleet leasing and fleet management solutions and related service programs to international companies in a wide variety of industries.

The group has issued CAD 400 million senior unsecured investment-grade notes with a tenure of five years. The notes are carrying an interest rate of 3.85%. The funds would be used to repay convertible debentures maturing June 30, 2020 amounting to CAD 567 million.

Q1FY20 Financial Highlights: EFN posted a decent set of numbers wherein net revenue stood at CAD 247.24 million, as compared to CAD 242.23 million in the previous corresponding quarter. The quarter was marked by a weak interest income and rental revenue, as compared to Q1FY19. Servicing income increased to CAD 125.84 million as compared to CAD 118.13 million in pcp. Net income for the period stood at CAD 79.36 million against CAD 80.47 million in Q1FY19. EFN witnessed a lower operating expense driven by a decline in salaries, wages and benefits. Depreciation and amortization costs stood marginally higher as compared to the previous corresponding quarter while the group saw a dip in amortization of convertible debenture discount. Total earning assets stood at CAD 11,999.63 million, as compared to CAD 13,141.27 million in pcp. Cash balance at the end of Q1FY20 stood significantly higher at CAD 90.84 million, as compared to CAD 24.22 million in FY19.

Q1FY20 Financial Snapshot (Source: Company Reports)

Risks and Challenges: The Group is witnessing a negative impact from the temporary setbacks from its client’s businesses which is likely to impact the operating income of the business. Due to the adverse economic growth, EFN might witness a spike in its provision for credit losses, which would result in lower profitability for the company.

Valuation Methodology: Price/ BV Multiple Based Relative Valuation (Illustrative)

Price to Book Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of EFN corrected ~9% so far this year amidst a sharp correction across the global equity market due to business disruption scenario on account of COVID 19 pandemic. The group has a stable client retention ratio of ~98%, which is impressive. Higher client retention ratio provides stable earnings and cash flow, which is positive. The group believes the demand for its offering to increase in the future as a lot of business are likely to outsource their fleet-related services in order to manage cost. Further, a demand for higher home delivery and the current boom in e-commerce is likely to support the demand of the group’s offerings. The group is strengthening its client relationship amid the COVID-19 pandemic and identifying cost savings opportunities for its clients. The Company witnessed decent organic growth and reported a 15% increment in the assets under management to CAD 17.8 million towards the end of the quarter, which is commendable. We have valued the stock using Price to Book value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered CI Financial Corp, Genworth MI Canada Inc and IGM Financial Inc, as peers. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 10.08 on June 18, 2020.

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

ECN Capital Corp.

ECN Capital Corp. (TSX: ECN) is a leading provider of business services to the United States based banks, credit unions, life insurance companies and investment funds. The Company operates through three operating segments, namely, Service Finance, Triad Financial Services and The Kessler Group.

Key Highlights:

• Recently, the Company confirmed its collaboration with Freddie Mac where Freddie approved the group’s subsidiary Triad Financial Services, Inc. as a qualified mortgage seller. The above agreement would gear up the company’s presence and would scale the Company’s real property lending solutions across the affordable housing segment.
• The Group declared a quarterly dividend of CAD 0.025 per common share, payable on June 30, 2020.
• The Company has withdrawn its FY20 guidance, as the impact of the pandemic is yet to be understood.

Q1FY20 Financial result: ECN impresses with its quarterly numbers, and reported revenues of USD 60.87 million, improved from USD 56.62 million in the previous corresponding period. The increase was driven by robust growth from both portfolio origination services and portfolio management services, while lower income from the company’s portfolio advisory services remained a drag. Interest income slide to USD 5.53 million from USD 6.10 million in the previous corresponding period. The quarter was marked by a remarkably lower operating expenses at USD 50.14 million compared to USD 87.20 million in Q1FY20. The lower expense was primarily attributable to a major decline in the other expenses due to the absence of restructuring costs in the current quarter. Compensation and benefits costs and share-based compensation stood lower than the previous corresponding quarter while the group reported a higher general and administrative expenses during the period. The company reported a net income of USD 5.02 million, as compared to a loss of USD 22.94 million in the previous corresponding period.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Key Risks: COVID-19’s full impacts are yet to be known. Any extension in lockdown measures or a second wave of the virus could result in a lot of business closure and a further spike in the unemployment rate. Such a scenario might affect the demand for the company’s offerings and may result in higher credit losses.

Valuation Methodology: Price to Book Based Relative Valuation (illustrative)

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

Stock Recommendation: The Management expects second-quarter FY20 results to remain at par with Q1FY20 for the Kessler Group segment and experiencing increased traction in the other two segments subsequent to 1QFY20. Applications are up 35% month to date in May in Service Finance segment, while ~25% up in Triad Financial Services. The group has a strong potential pipeline which is likely to be realized in late 2020 and 2021. The Company's operations are well-positioned to weather the current pandemic. The group's home improvement finance and manufactured housing finance are considered as 'Essential businesses' and are exempt from restrictive orders. We have valued the stock using the price to book based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). For the said purpose, we have considered peers like Intact Financial Corp, Equitable Group Inc, Genworth MI Canada Inc. Hence, considering the aforementioned factor and risk scenario, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 4.13 as on June 18, 2020.

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

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