Element Fleet Management Corp.

Element Fleet Management Corp. (TSX: EFN) is the global leader in the fleet management industry, providing world-class fleet management services that empower extraordinary results across the total fleet lifecycle.

Key Highlights:

• High Scope of expansion across Self-managed fleets segment: Within the Self-managed fleets segment, the group has a strong room for growth, as it constitutes a major portion of the fleet management industry across the countries in which it operates.

Source: Company Presentation

• Steady Improvements: The company reported a steady growth during the recent quarters, wherein revenue improved to CAD 420.8 million in Q4FY20, as compared to CAD 416 million in Q3FY20 and CAD 414.8 million in Q2FY20, respectively. Similarly, net income was higher at CAD 78.4 million in Q4FY20, as compared to CAD 70.8 million and CAD 58.6 million in Q3FY20 and Q2FY20, respectively. Notably, the company has successfully reduced its debt component to CAD 10,030 million in Q4FY20, lower than CAD 10,980 million and CAD 12,006 million in Q3FY20 and Q2FY20, respectively. Reduction in the debt component would lead to lower finance costs and would support the company’s bottom-line.

• Improved Financial Flexibility: The company has improved its financial flexibility over the years, supported by the successful implementation of the transformation program. The company reported improved margin and higher free cash flow during the last few years, which is encouraging.

Recent Trends of Free Cash Flows and Adjusted operating income margin (Source: Company Presentation)

FY20 Financial Highlights:

• EFN announced its full-year result, wherein the company posted net revenue of CAD 963.093 million, as compared to CAD 994.102 million in FY19.
• Operating expenses stood lower at CAD 502.876 million, 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 slightly 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, primarily due to inclusion of Impairment on 19th Capital expense amounting to CAD 260 million in FY19.

FY20 Income Statement Highlights (Source: Company Report)

Risks: Due to further restriction to contain the second wave of virus, the group might witness a decline in the estimated value of the collateral loans and leases, which would 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 has solidified its core business and is looking to enhance its organic revenue growth through leveraging its scalable operating platform. Moreover, the group transformed into a capital-lighter business model that has enhanced its return ratios and strengthen the company’s balance sheet. The company is focusing on the retention of its existing clients and would focus on new client’s acquisition and increase the share of wallet of each client. 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 13.73 on March 9, 2021.

One-Year Price Chart (as on March 9, 2021). Source: Refinitiv (Thomson Reuters)

Primo Water Corporation

Primo Water Corporation (TSX: PRMW) is one of the largest pure water solutions providers, which has a presence across North America, Europe and Israel. The group operates through razor/razor blade revenue model, which is an industry-leading line-up solution used for sleek and innovative water dispensers and are sold through major retailers and online platforms.

Key Updates:

• Impressive Guidance: The group expects its FY21 revenue to remain ~5% higher than FY20, while Adjusted EBITDA is expected in between USD 370 million and USD 380 million (FY20 Adjusted EBITDA was at USD 361.5 million). For the entire year, the company expects its capital expenditure at ~USD 135 million. Meanwhile, for Q1FY21, the company expects its revenue within the range of USD 455 million and USD 485 million, while adjusted EBITDA is expected within USD 70 million and USD 75 million. Moreover, as per the Management, the long-term guidance remains positive for the company and they expect organic growth of more than 5% after FY22. Adjusted EBITDA margin is expected to remain above 18% after FY22, depicting a growth of 20 bps to 30bps per year.

Q1FY21 and FY21 Guidance (Source: Company Report)

• Decent Q4FY Performance: The company reported solid fourth quarter performance with revenue growth of ~15% on a YoY basis, and gross profit expanded by 8% and operating margin nudged by 70% against the year over period.

Q4FY20 Financial Highlights:

• PRMW announced its quarterly result, wherein the company posted revenue of USD 505.0 million, higher than USD 440.0 million in the previous corresponding period (pcp).
• Gross profit stood higher at USD 281.8 million, as compared to USD 260.2 million in pcp, supported by higher revenue, partially offset by an increase in the cost of sales (USD 223.2 million versus USD 179.8 million in pcp).
• The group reported an operating income of USD 24.5 million, significantly higher than USD 14.4 million in Q3FY19. Driven by solid top-line growth and profit expansion, despite the quarter witnessed higher selling, general and administrative expenses amounting to USD 247.6 million versus USD 236.5 million in Q3FY19.
• The group reported a net loss from continuing operations of USD 20 million, as compared to a net income of USD 1.9 million in the same period of the previous financial year.
• Cash and cash equivalents were recorded at USD 115.1 million, while total assets were recorded at USD 3,604.7 million.

Q4FY20 Income Statement Highlights (Source: Company Reports)

Risk: A change in consumer preference would lead to a deterioration in the company’s sales and overall performance.

Valuation Methodology (Illustrative): Price to Earnings 

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

Stock Recommendation: For FY20, the group reported an impressive topline and solid profitability growth and reported its revenue and adjusted EBITDA of USD 1,953.5 million and USD 361.5 million, respectively, reflecting a surge of 8.8% and 25.9% on Y-o-Y basis, respectively. Moreover, the group reported an adjusted EBITDA margin of 18.5% in FY20, improved from 16% in FY19. During FY21, the company will be focusing on leveraging its pure-play water model to drive organic revenue growth and would enhance its penetration within the European residential base. Moreover, in order to improve its efficiency, the company would synchronize a highly variable cost structure, which is a key positive and would drive overall margins. We have valued the stock using the P/Earnings 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 Rollins Inc, Chemed Corp etc. Hence, considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 19.94 on March 09, 2021.

1-Year Price Chart (as on March 09, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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