Small Caps | Nov 11 2015
-New business lifts outlook
-Growth drivers in play
-Diversified funding, income
By Eva Brocklehurst
Eclipx Group ((ECX)) continues to reinvigorate its business, with new business and assets under management performing ahead of prospectus forecasts in FY15. Management has guided to around 10% increase in book growth with lower corporate costs in FY16. Cost cutting will continue to feature as IT platforms are merged.
Given the portfolio nature of the company's business model, new business wins and the performance of assets under management are the leading indicators of the outlook. On these metrics Credit Suisse considers the company has done well, highlighting diversified funding and benign trends in impairments.
A previously stagnant business has been turned around, Macquarie observes, with a strategy based on improving the vehicle offering and expanding consumer offers through carloans.com.au and commercial equipment finance. This strategy has been a means to lift new business to $841m in FY15, up 35% on the prior year. This compares with a prospectus forecast of $773m, Macquarie observes. The broker considers the metrics are solid and this bodes well for the FY16 result.
Macquarie considers the slump in the share price in the wake of the result an excessive reaction. One important factor to consider, the broker asserts, is that income earned over the life of the lease comprised 70% of the company's net operating income in FY15, while up-front revenue accounted for 14% and end-of-lease 16%. This is different to other listed companies in this sector, which generate a higher proportion of earnings up front or on a transaction basis.
Credit Suisse maintains there will always be some volatility, in some quarters, in terms of revenue, agreeing with management that overall net operating income is the most relevant metric. The main risks lie with end-of-lease income (which was in line with prospectus in FY15) but the figures above show this accounts for a lower proportion of Eclipx revenue than for peers.
Macquarie concurs that risks centre on residual value – where the funds from disposal of funded vehicles could be less than the value of the lease outstanding. Such an outcome can be caused by external events such as recalls, recessions or miscalculations by the company, but brokers believe the outlook is stable at present. There is also the risk that comes with changes in securitisation markets which the company accesses.
Still, a number of growth drivers de-risk the outlook, brokers contend. Macquarie envisages the two main ones are positive trends in new vehicle affordability and sales growth, and the increasing number of financing options available.
UBS notes new business has been won in the government sector, funded through third party arrangements. Management has highlighted the efficiency of funding these government exposures via this principal & agent arrangement (P&A), but UBS believes it is a little outside of its strategy to shift volumes into company-funded facilities. The broker will watch the mix closely.
Credit Suisse expects the trends towards warehouse usage will likely continue, subject to large contract wins in either the corporate or government space, which would mean the company is more likely to use P&A funding.
Changes to capital adequacy rules are also a potential risk. In this regard brokers note the potential for the Australian Prudential Regulatory Authority (APRA) to make modifications to capital rules for warehousing, with a new framework is expected in coming weeks, although no changes have yet been suggested.
FNArena's database has four Buy ratings for Eclipx. The consensus target is $3.37, suggesting 3.5% upside to the last share price. Targets range from $3.33 to $3.40. The dividend yield on FY16 forecasts is 4.2% and on FY17 forecasts 4.7%.
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