Australia | Nov 09 2022
Brokers remain upbeat on Eclipx Group following FY22 results in line with consensus forecasts.
-FY22 results for Eclipx Group were in line with consensus expectations
-All three brokers in the FNArena database retain an overweight stance
-Management initiates new cost-out program
-Cash holdings provide a natural hedge against funding costs
By Mark Woodruff
Brokers in the FNArena database find no definitive reason to justify the near -6% fall in share price for Eclipx Group ((ECX)) that accompanied the release of FY22 results on Monday.
The best guess by Credit Suisse is the market's ‘acknowledgement’ of the good performance of CEO Julian Russell. It was announced he will be replaced in February 2023 by current CFO Damien Berell.
According to media speculation after the results, the company has recently held talks with private equity firms about a buyout. It’s believed Russell, a former UBS investment banker who advised Eclipx on previous corporate activity, will work to find a buyer for the business.
Morgan Stanley also attributes the negative share price reaction to the CEO transition and a -$62m headwind for end-of-lease (EOL) income. It's thought the latter may not have been allowed for by consensus. Overall, the FY22 results were considered robust.
While Credit Suisse notes few surprises within the FY22 results that were in line with consensus expectations, maximum cash generation continues via elevated EOL income and new business.
FY22 profit (NPATA) rose by 29% year-on-year, due to elevated yields and EOL income, as vehicle supply remains restricted.
The company is one of Australia’s leading providers of fleet management services and also operates in New Zealand. Products include a range of motor vehicle services from acquisitions, leasing, in-life fleet management and remarketing.
Macquarie points out positive jaws were delivered again in FY22, with net operating income (NOI) growing by 4.0% pre-EOL growth, and operating expenses held flat for the third consecutive year despite inflationary pressures.
The NOI growth was supported by a combination of net margin, higher maintenance margins and management fees, observes the broker.
EOL of $92.3m was in line with Macquarie’s estimate and rose by 33.4% year-on-year due to average unit profitability.
Management also announced a -$25m capex spend for the new Accelerate project, which will aim to reduce annual operating expenses by -$6m per year from mid-FY25. The three-year program is designed to consolidate multiple operating systems and remove duplication of brands, systems and processes.
Interest rate exposure
Macquarie points out Eclipx Group’s cash position provides a natural hedge against funding costs.
The typical on hand cash balance of $230-250m provides an offset against funding costs on the warehouse and corporate debt, explains the analyst.
The company estimates a 25bps move in interest rates would impact FY23 annualised profit (PBT) by around -$500,000.
Outlook
Credit Suisse retains its Outperform rating on a compelling valuation and expectation for FY25 growth, though acknowledges a lack of near-term catalysts for a share price re-rate. The broker also maintains its $2.50 target price.
Morgan Stanley cites undemanding current multiples, a strong balance sheet, buybacks and organic opportunities to justify its unchanged Overweight rating and $3.00 target.
Only small changes were made to Macquarie’s earnings forecasts, though the target price falls to $2.19 from $2.98 to reflect a movement in small cap multiples since the release of first half FY22 results for Eclipx in May this year.
This broker maintains an Outperform rating on the company’s underlying performance and expects vehicle supply will normalise. Opportunities are envisaged for both Small Fleet and Novated Leasing, with both segments only having around 2% market penetration.
The average target price in the FNArena database for these three brokers is $2.56, which suggests 34.2% upside to the latest share price.
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