Small Caps | Jun 09 2016
-Strong growth in consumer segment
-Major synergy gains with Right2Drive
-Flexible funding advantage
By Eva Brocklehurst
Leasing and vehicle finance business EclipX ((ECX)) has provided greater understanding of its strategy at its inaugural investor briefing, highlighting its technology, integrated systems and risk management.
Credit Suisse left the briefing with further confidence in business momentum, noting management's optimism. New business is being written and while it can be hard for an outsider to dfferentiate the telematics offering from those of competitors, factors such as consistent tax rulings, integrated calendars and the ability to enable savings for clients are all crucial positives, the broker contends.
Furthermore, telematics is expected to support trends for increased fleet management outsourcing and the ability to use multiple distribution channels and leverage wholesale relationships. The stock's relative premium versus the ASX Small Industrials index that the broker suggests with its $4.10 target is considered warranted, given the strong momentum in the stock.
Citi, on the other hand, finds the stock fairly valued. Hence a downgrade to a Neutral rating. This broker is nevertheless also more confident in the ability to grow the core fleet business above system after the briefing. On the same theme Citi notes the differentiated technology, which has led to winning over clients such as Coca-Cola and Parks Victoria. Strategic diversification is also hailed a winner, with the expansion to consumer offerings such as Right2Drive from just corporate leasing.
Macquarie retains an Outperform rating despite the bounce in the stock since the May results, given the potential for the consumer and Right2Drive business. The broker observes Right2Drive is experiencing strong growth in both volume and revenue and should be able to grow even faster with the backing of EclipX.
Leasing costs are a major synergy gain, as Right2Drive will now be able to source cars internally, and this is a key input into a forecast uplift in margins in FY17. There are 1,200 cars available for hire and this supports the broker’s FY17 revenue estimates. The company is also preparing new warehousing to become more cost competitive in the government and large corporate market.
Presentations by division managers and outlining of specific business initiatives underscore Deutsche Bank's conviction in the stock. A turnaround has been navigated and the broker expects the company to now capitalise on its scale, efficiency and capabilities. Initiatives such as telematics, straight-through processing, fleet analytics and customer portals are proving to differentiate the company in the market, evidenced by strong growth in new business.
Deutsche Bank expects this technological advantage will deliver cost and margin enhancement over several years. The broker also envisages a strong opportunity to grow share in the consumer segment through new distribution channels and cross selling, supported by the recent acquisition of Right2Drive.
What is Right2Drive? This is a medium-term rental operator and customer of EclipX. The business provides rental replacement vehicles to eligible drivers who have damaged cars in an accident. Right2Drive has 16 branches across Australasia and is the largest domestic player, with a 7.5% market share.
UBS observes the accident vehicle replacement market in Australia is small and under developed, with low levels of awareness at both a consumer and corporate level. This provides scope to lift the profile of the business.
EclipX also has a flexible funding system which allows intra-lease adjustments, a significant advantage in managing risk Deutsche Bank maintains. Several additional distribution channels have been developed for end-of-lease assets, which the broker believes provide an advantage in pricing.
On FNArena's database there are five Buy ratings and one Hold (Citi). The consensus target is $3.87, suggesting 4.5% in upside to the last share price. Targets range from $3.42 (Morgan Stanley) to $4.20 (Macquarie).
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