Treasure Chest: EclipX Rising Or Eclipsed?

This story features MCMILLAN SHAKESPEARE LIMITED. For more info SHARE ANALYSIS: MMS

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Risks for EclipX remain elevated, brokers agree, but has the market reaction presented an opportunity?

-Corporate interest may reappear if fleet and novated businesses are proven stable
-Addressing concerns through the sale of Right2Drive and Grays appears the most favourable outcome
-Until further detail is provided, a material discount is likely to be applied
 

By Eva Brocklehurst

EclipX Group ((ECX)) felt the wrath of investors recently, after announcing a precipitous fall in its net profit for the first five months of FY19. Nevertheless, most brokers believe, while the risks are elevated, they are manageable through self-help initiatives, asset sales or a potential equity raising.

Subsequent to the news, McMillan Shakespeare ((MMS)) advised it does not expect to complete its takeover bid, although the scheme implementation agreement remains in place until April 30, 2019. The likelihood the merger will not proceed is clearly a negative signal but if EclipX can prove its fleet and novated businesses are stable, Credit Suisse suspects corporate interests may reappear.

Citi agrees, suspecting consolidation potential remains and upgrading EclipX to Buy/High Risk in the wake of the announcement. The broker considers the stock oversold, although acknowledges ambiguity exists. Restructuring, cost reductions and disposing non-core assets offer scope for improved profitability, although Credit Suisse emphasises the momentum is very negative.

While the company has materially underperformed peers in recent trading, a softer economic backdrop means the broader sector sentiment has declined over the past 6-9 months and is now trading on an historically high discount to the Small Ordinaries index, UBS notes.

Grays and Right2Drive were the main culprits in the downfall and are currently progressing through a sales process. Management has confirmed potential interest from a number of parties.

Morgan Stanley believes a sale of these companies could provide the much-needed catalyst for the company, although suspects the market will take a "wait-and-see" approach and, while there is strategic value in the core fleet business, qualitative concerns remain in focus.

Macquarie agrees that until the company can provide more information, including audited accounts, a material discount will be applied and any corporate activity will be on hold. Still, the market reaction may have presented an opportunity, in the broker's view.

Balance Sheet

The company is in compliance with its covenants of February 28, 2019 and Morgan Stanley believes this will be the focus for the market at the interim result.

UBS assesses material upside potential from current levels, although balance sheet stresses need to be dealt with. Addressing these concerns, through the sale of the two non-core businesses, would be the most favourable outcome. The broker calculates a $50m-plus sale would address the problems and mean the core business trades on a pro forma FY19 PE of less than 4x.

UBS does not believe the company will breach its corporate debt covenants at the first half results. A goodwill or net asset reduction of over -$173m would be required to risk the covenant, considered unlikely.

UBS envisages greater risk at the FY19 result and a $33m-plus improvement, via general performance, in asset sale or sale of mezzanine debt is required to prevent a breach. The broker reduces FY19-21 estimates for earnings per share by -38-44% to reflect near-term performance trends and break-even operations at R2D and Grays from FY21.

That said, UBS assesses the company has a solid market position in its valuable core fleet offering across Australasia and good visibility, as around 70% of earnings are generated by the book in place at the start of the year.

FNArena's database shows three Buy ratings and two Hold. The consensus target is $1.05, signalling 53.8% upside to the last share price. Targets range from $0.88 (Credit Suisse) to $1.29 (Citi).

Disclaimer: the writer has shares in the company.

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