Element Fleet Management

Element Fleet Management (TSX: EFN) is the largest pure-play automotive fleet manager in the world, providing the full range of fleet services and solutions to a growing base of loyal, world-class clients – corporates, governments, and not-for-profits – across North America, Australia, and New Zealand. 

Key highlights

• The bullish stance of management: The management is bullish and believes it can sustainably, organically grow in all geographies and would achieve annual net revenue growth of 4-6% in normal market conditions. It would further lead to high single-digit to low double-digit yearly operating income growth. The annual free cash flow growth would be in a range of high single-digit to low double-digit.

• Increase in cash from operation: In Q1 2021, the cash provided by operating activities increased tremendously to CAD 920.2 million, against CAD 308.4 million in the previous corresponding period. The increase was primarily due to lower investments in finance leases and equipment under operating leases resulting from postponed orders and delayed originations driven by COVID-19.

• Issued Senior Notes: The Company further reduced its cost of funds with issuances of USD 500 million of 3-year 1.60% senior unsecured notes and USD 750 million of vehicle management asset-backed term notes – each achieving the Company’s best-ever pricing in those markets. The Company utilized the proceeds to pay down variable funding notes outstanding.

• Industry beating margins: Despite the hard time, the management’s solid determination helped in leaping the industry median margins on many fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.

Margin Comparison, Analysis by Kalkine Group 

Financial overview of Q1 2021 (In thousands of Canadian dollars)

Source: Company

• On the back of healthy net finance revenues, the company posted net revenue of CAD 248.5 million in Q1 2021, compared to CAD 247.2 million in the previous corresponding period.
• Lower salaries and lower G&A expenses helped the company post lower operating expenses in the reported period at CAD 117.4 million, against CAD 125.9 million in pcp.
• The company posted a net income of CAD 95.5 million in Q1 2021, against CAD 79.3 million in pcp thanks to lower amortization and no restructuring cost. However, the net income was partially offset by higher provision for income tax. 

Risk associated with investment

The company is not immune to the risks present in the industry. Some of the highlighted risks are adverse economic conditions that may decrease the estimated value of the collateral securing loans and leases. Furthermore, the continuation of the COVID-19 pandemic could lead to financial losses in the company's portfolio and a decrease in its net income and book value.

Valuation Methodology (Illustrative): Price to Book Value

Stock recommendation

In Q1 2021, the company posted encouraging numbers in terms of business performance post-transformation. Net revenues grew on a Y-o-Y basis, fuelled by 35% and 22% growth in ANZ and Mexico, respectively. Furthermore, it used the scalable operating platform to convert this revenue growth into even more tremendous adjusted operating income growth. Moreover, it leaps the industry median margins on many fronts in Q1 2021, which is a key positive. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 13.73 on May 25, 2021. We have considered Intact Financial Corp, IGM Financial Inc, ECN Capital Corp, etc., as the peer group for the comparison.

One-Year Price Chart (as on May 25, 2021). Analysis by Kalkine Group.

*The reference data in this report has been partly sourced from REFINITIV.

ATS Automation Tooling Systems Inc.

ATS Automation Tooling Systems Inc. (TSX: ATS) is an automation solutions provider. The Company is engaged in planning, designing, building, commissioning and servicing automated manufacturing and assembly systems, including automation products.

Key highlights

• Rising Order Backlog and Bookings:  In FY 2021, the company reported a backlog of CAD 1,160 million, higher than CAD 942 million in FY 2020, while the order bookings also increased to CAD 1,626 million V/s CAD 1,468 million in the previous corresponding period. Higher-Order Bookings primarily drive the rise in order backlog in the life sciences and consumer products markets. Furthermore, the higher backlog indicates future revenues.

Data Source: Company

• Robust cash flow generation: Operating activities produced cash flows of CAD 185.2 million in FY 2021, compared to CAD 20.3 million in the previous corresponding period. The increase in operating cash flows related primarily to the timing of investments in non-cash working capital in certain customer programs.

• Acquiring BioDot, Inc.: BioDot, Inc., a major maker of automatic fluid dispensing systems, is being acquired by the company for USD 84 million (CAD 106 million), with the deal scheduled to close in the second calendar quarter of 2021. We assume that the inclusion of BioDot would strengthen its role in clinical diagnostics lab automation and extend its Life Sciences capabilities in accurate, low volume fluid dispensing.

• Healthy Liquidity: As on March 31, 2021, the company holds CAD 187.5 million under its cash balance and CAD 775.8 million under its consolidated credit limit. The management believes this liquidity would be sufficient to fund its requirements for investments

Financial overview of FY21

Source: Company

• In FY 2021, the Company registered muted growth in revenue to CAD 1,430 million, against CAD 1,429 million in the previous corresponding period. The rise was primarily due to revenues clocked from acquired companies.
• On the back of lower cost of sales and lower restructuring expenses in FY 2021, the Company’s earnings from operation stood at CAD 119.6 million compared to CAD 95.6 million in pcp.
• EBIT stood at CAD 79.4 million, against CAD 67.5 million in pcp. Although the finance cost increased to CAD 40.1 million.
• The Company posted Net Income of CAD 64.1 million in the reported period, against CAD 52.9 million in the pcp, partially offset by higher income tax expense. 

Risk associated with investment

Due to the tepid economic scenario, the business might witness a reduction in the order book, which might lead to lower revenue. The existing macro challenges might lead to delay in the payment activities by the clients which might act as a major setback to working capital management.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

With the purchase of CFT in late March and a final agreement to purchase BioDot in the next fiscal year, it set the groundwork for continued expansion through an M&A strategy. CFT joins its MARCO operations to serve the regulated food and beverage equipment market while BioDot would expand its Life Sciences capabilities in precise, low volume fluid dispensing and enhances its position in the point-of-care and clinical diagnostics lab automation end-markets. Furthermore, the company caters to a unique segment, and the demand for medical instruments is likely to remain robust. The management expects to convert its healthy order backlog to revenues in the 35% to 40% range based on project mix. Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock at the closing price of CAD 30.01 on May 25, 2021. We have considered Stantec Inc, Toromont Industries Ltd, Finning International Inc, etc. as the peer group for the comparison.

One-Year Price Chart (as on May 25, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.