New Team At Eclipx Paves Way For Growth

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-Opportunities to expand
-Predictable revenue stream
-Scope for modest re-rating?
 

By Eva Brocklehurst

Eclipx Group ((ECX)), a vehicle fleet leasing and management service provider, has laid a firm foundation for growth and two brokers initiate coverage on the stock.

Over the past year there have been fundamental changes made to the corporate structure and senior management. Eclipx hired a new leadership team in early 2014 to transform the business into an online, service-led, financial services group. This presents some risk in terms of the speed of change but the first half result suggests to Citi the company is well able to expand into adjacent areas and participate in the digitisation of the financial services industry. Citi remains confident in future profit growth but considers the stock is fairly valued and opens with a Neutral rating with a $3.35 target.

There are three general growth drivers for the company, the broker suggests. Opportunities exist in consolidating within the industry, with economies of scale to be found in funding, procurement of parts and fuel and logistics. There is potential to migrate current third party funding arrangements into its own facilities and expand margins. Thirdly, while vehicle operating leases are the core business, consumer and equipment finance are considered genuine opportunities for growth.

Citi expects FY15 net operating income will grow more than 10%. Downside risks are in the nature of a highly fragmented, mature and competitive industry. Material or sudden changes in access to funding could also impact profitability while inadequate pricing of residual values may impact on operating lease contracts. Still, the company has a highly predictable and recurring revenue stream.

Credit Suisse believes the highly credentialled new management team will drive a transformation in the business. The company listed on ASX earlier this year and, near term, earnings are protected by pre-IPO provisioning and impairments, while FY16 appears increasingly supported by stronger volumes. Merger integration and productivity benefits offer the potential for a two to three year cost reduction story. The broker has an Outperform rating and $3.30 target.

Catalysts for Credit Suisse include the FY15 results – the company has a September year end – and expiry of the Ironbridge escrow arrangements in November. Eclipx is trading on 13.3 times prospective earnings which compares with its listed rivals SG Fleet ((SGF)) on 13.2 times and McMillan Shakespeare ((MMS)) on 13.1 times. Leasing stock multiples are cyclical, and Credit Suisse envisages scope for a further modest re-rating for Eclipx, while residual value, credit and acquisition risks prevail for this type of stock.

Eclipx provides a broad offering to corporates and individual customers in Australia and New Zealand. The company estimates its market share in vehicle fleet leasing and management in Australia is 10%, while it is 21% in New Zealand. The company has a consumer business which offers a range of novated leasing to employees of its corporate customers as well as online consumer vehicle finance to individuals. Eclipx recently moved into equipment finance, seeking to leverage its existing capabilities to cross-sell to the corporate customer base.

The company operates under five brands: FleetPartners, FleetPlus, CarLoans.com.au, FleetChoice and the recently launched Eclipx Commercial. The business has developed an integrated platform over 27 years of operations with vehicle procurement, vehicle funding, management and end-of-lease re-sale.
 

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