Australia | Mar 11 2021
Despite the constraints created by a shortage of new cars, robust used car prices have ensured Eclipx can deliver substantial earnings growth
-Used car pricing benefit underpins FY21 earnings
-While short supply of new cars creates order backlog
-Industry consolidation implies upside risks
By Eva Brocklehurst
A surge in end-of-lease income has placed Eclipx Group ((ECX)) in a strong position to deliver earnings growth across its portfolio. An update on trading just one month out from the end of the half year (March) has revealed that, despite the constraints being experienced with new cars in short supply, orders are growing.
Eclipx has been a beneficiary of higher used car prices, showing up in stellar end-of-lease income, partially offset by constraints on renewing fleet values and meeting novated leasing demand.
Credit Suisse assesses the high profits from this end-of-lease income are unsustainable and a reversion to the norm poses a headwind to FY22 earnings. Still, the cash is being banked now and will help reduce debt.
The broker is also comfortable that consensus forecasts take current circumstances into account in FY22-23. Furthermore, new business should grow as the economy recovers and new vehicles and shipping returns to normal.
End-of-lease income was $26.4m to the end of February, with just one month ago to the end of the first half. First half FY20 end-of-lease income was $15.5m, and Eclipx anticipates the relevant benchmark in future will be more like this. Results are expected in mid May.
Morgan Stanley found the operating performance consistent with its expectations and appreciated the extra detail regarding new business which, although still below pre-pandemic levels, has revealed a build-up in demand.
As a result the broker believes Eclipx is progressing towards a forecast net profit in FY21 of $56.7m. The company has also reported $300m in asset-backed securitisation which will reduce the cost of funding.
Supply Risks
Macquarie explains that the risk from a lack of new vehicle supply, which is driving higher used car prices, centres on the company's ability to secure vehicles to meet new business demand in fleet and novated leasing.
As a result, the total fleet value could depreciate faster than new business would counter it. Higher fleet yields act as an offset, but the broker notes lower book values and the impact on novated activity remain the key downside risk.
Still, Macquarie agrees operating conditions should support FY21 earnings, driven by end-of-lease income. Moreover, should vehicle supply problems extend into FY22 and support used car prices, then upside risks to estimates are still envisaged.
Value?
Credit Suisse finds the valuation undemanding and suspects a resumption of dividends should be forthcoming in FY21. Moreover, the company could be a potential beneficiary of corporate action in the medium term.
Eclipx has also confirmed no cash tax will be paid in FY20 and Credit Suisse understands this situation should continued for 4-5 years. Given organic growth opportunities and the upside risks from sector consolidation, UBS agrees the stock's multiple is undemanding. A consolidation scenario could mean $20-40m in synergies that implies material upside risks for Eclipx.
Growth, too, should be delivered in novated leasing, as Eclipx will be the first to market an end-to-end digital offering. The broker notes the company is materially underpenetrated across eligible customers, at 1.6% compared with its peers at 5-8%.
This should drive above-market growth in corporate fleet, with a focus on sale-and leaseback opportunities. Also, distribution partners are likely to have a positive impact in the small-medium enterprise segment. FNArena's database has four Buy ratings for Eclipx. The consensus target is $2.32, signalling 25.1% upside to the last share price.
Disclaimer: The writer has shares in Eclipx Group
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