Australia | May 11 2022
Ongoing strength in the used car market has seen Eclipx Group deliver a strong first half result, with the company utilising the current benefit to guarantee its longer-term earnings profile.
-Used car pricing trend should support Eclipx Group’s near-term earnings
-Market guiding to used car prices remaining stronger for longer
-New business and inorganic growth to soften an eventual transition to normalised pricing
By Danielle Austin
While the market is largely in agreement that used car prices will return to a more normal level at some point, Eclipx Group ((ECX)) continues to take advantage of elevated prices in the interim with some market analysts anticipating pricing will remain stronger for longer than initially expected.
The company delivered record half year earnings, with first half net profit of $60.4m reflecting a 58% increase year on year, and a notable beat to consensus forecasts of $46.2m. The result supported 110% cash conversion, and left the company in a $6.8m net cash position at the end of the half having eliminated $61m in debt.
Although used car pricing was the feature of Eclipx Group’s interim results, a solid performance in end-of-lease income provided a great supporting act, up 60% to $51.4m. Constraints in the used car market appear to be elevating end-of-lease income growth, with average unit profitability up 48% in the half to $8,813. Despite the current inflationary environment, the company also managed to reduce operating expenditure -2% in the half.
Eclipx is making the most of its current benefit by deploying surplus, announcing a $40m buyback that should allow the company to secure an improved permanent earnings position. The buyback represents 65% of first half net profit, and the top end of the company’s capital distribution guidance range. With cash flow also strong in the last period, the company should be able to maintain a net cash positive and invest in future growth alongside ongoing buybacks, with $96m in buybacks announced in the last year.
Building buffer ahead of transition to normalised used car pricing
Continued strong results from Eclipx will suffer with a normalisation of used car pricing likely ahead, but the company’s new business and growth outperformance should soften the transition.
Despite vehicle supply constraining new business writings, the company reported $368m total new business written in the first half, up 19% year on year, while a sizeable order backlog, reportedly now 2.7 times pre-covid levels, should further soften volatility ahead. Combined with a number of new and existing client wins recently, the company has suggested it expects asset growth to return as new vehicle supply stabilises in coming periods.
With three FNArena database brokers covering the release of Eclipx Group’s interim results, we note all are Buy-rated or equivalent and between them have an average target price of $2.99.
Credit Suisse has an Outperform, and following the release of the company’s first half results lifted its target price 15 cents to $3.10, making it the highest target within FNArena's coverage. On the back of a strong half the broker lifted its earnings per share forecast for the current financial year 34.5%, with Credit Suisse analysts expecting current elevated prices for used cars to persist at least for the remainder of the financial year.
The broker also lifted earnings per share forecasts 17.2% and 14.6% for FY23 and FY24 respectively, given a higher starting base for car prices and assuming prices will still be above average in FY23 if pricing begins to normalise in early FY23 at the earliest. Credit Suisse continues to assume a return to income levels similar to FY19 by FY24, but now predicts normalisation to occur on a slower trajectory, and notes higher end-of-lease income predictions are the biggest driver of the increases to earning per share estimates.
Similarly, with elevated used car pricing supporting strong end-of-lease income returns, Macquarie has upgraded earnings per share forecasts 39.4%, 23.0% and 8.7%. The broker holds an Outperform rating and a target price of $2.98, noting that moderation in used car pricing ahead of the normalisation of supply constraints would place its outlook at risk.
Macquarie analysts noted that while both supply constraints and elevated end-of-lease income will normalise, the company’s underlying performance supports the rating. The broker also highlighted the announced buyback is Eclipx Group’s most efficient method to deliver capital distributions given the company is not in a tax-paying situation in Australia.
With an Overweight rating and a target price of $2.90, Morgan Stanley noted that even in the case of prices tapering in the coming half, the strong performance in the first half materially de-risks full year expectations, with the broker forecasting Eclipx Group can achieve full year profit of $80.6m.
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