Australia | Nov 03 2016
The outlook for leasing and vehicle finance business, EclipX, is promising and brokers consider its growth ambitions remain well supported.
-Growth drivers include new vehicle sales and increased availability of finance options
-Upside risks to funding costs in the medium to longer term
-Appears to be taking share from competitors
By Eva Brocklehurst
The outlook for leasing and vehicle finance business, EclipX ((ECX)), is promising, as brokers observe the company has a high percentage of recurring revenue and strong visibility on earnings. The company's FY16 results were compositionally solid and cost discipline was evident. A strong funding position is expected to support the company's growth ambitions, with upside risk to earnings estimates expected from winning new clients.
FY16 cash profit of $55.3m was up 14%, above the guidance range of up 8.5-10%. New business worth $932m was written, leading to assets under management or finance (AUMOF) of $2.04bn, up 15%. FY17 growth guidance for net profit is 18-21%. The company has also made a small bolt-on car rentals acquisition, Onyx, to boost its Right2Drive business.
Macquarie envisages two key growth drivers for the automotive finance sector, which augurs well for EclipX. These are continued growth in underlying new vehicle sales and the increasing number of financing options available on competitive terms.
This includes dealer finance at the point of sale, on-line offers, novated leases and fleet funding. The increased range of funding options is leading to a greater proportion of consumers using finance to purchase a vehicle and the broker notes this has risen to 49% in 2015 from 41% in 2011.
Macquarie believes the company's warehouse funding structure, in which around 80% of the funding is in the form of at least AA rated security, is well placed to withstand any ructions in credit markets and places it in a strong competitive position. Moreover, Eclipx is not reliant on securitisation markets to continue to write new business.
UBS suspects, while near term interest rates are likely to remain constrained, there is risk to the upside for funding costs in the medium to longer term. In terms of sensitivities, the broker estimates that each 25 basis points of change in funding costs impacts FY18 forecasts by circa 2%. That said, any step-change in funding costs can be mitigated by price increases and a switch to using a greater amount of P&A (principal & agency) funding.
With strong momentum in new business, the company is well placed to continue growing share in the mature fleet leasing market, in the broker's opinion, and a substantial contribution is expected from this segment. UBS estimates equipment finance and Right2Drive account for around 20% of group profit in FY17, but will contribute 40% of the uplift in earnings over FY17-FY20.
The cost/income ratio was higher than CLSA expected, with on-boarding costs and Right2Drive integration providing the drag. The broker assumes AUMOF to be 6-8% higher than previously forecast and the net operating income/AUMOF margin to be around 90 basis points above prior forecasts. These are offset by expectations for a higher cost/income ratio and the deferral of operational expenses. Hence, the broker reduces earnings per share forecasts by 5%.
Nevertheless, the results still confirm the stock as the broker's top pick in the vehicle leasing segment. CLSA, not one of the eight brokers monitored daily on the FNArena database, retains a Buy rating and $5.00 target.
Given such a competitive industry, Credit Suisse is impressed with the performance and believes the company has the momentum necessary to meet FY17 targets. Trading at a price/earnings ratio of 14.7x on FY17 estimates, the broker considers the stock inexpensive. EclipX also appears to be taking share from competitors while maintaining discipline, in particular in the key area of setting residual values.
The broker acknowledges competition has had some negative impacts, such as lower net operating income margins in Australian commercial segments, but the company is envisaged maintaining profit margins through operating leverage and managing its risk profile.
Citi is more cautious compared with the preceding brokers. The results were largely in line with its expectations and FY17 is expected to come out ahead of guidance. The broker also believes there are more acquisitions on the horizon.
Citi retains a balanced outlook, welcoming the company's LogBookMe and Australian Taxation Office-compliant offering, which are observed gaining traction with clients, as well as the opportunities for growth into adjacent areas as R2D gains scale in the accident repair car rental market. Countering this are the potential challenges from increased funding costs, and pressure on interest and revenue margins as EclipX grows into the large corporate and government sectors.
FNArena's database shows four Buy ratings and one Hold (Citi). The consensus target is $4.22, suggesting 14.1% upside to the last share price. Targets range from $4.00 to $4.50.
See also, EclipX Confident Of Technology Advantage on June 9 2016.
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