ECN Capital Corp.
(ECN-T) C$3.59
Strategic Review; Raising Target Price and Risk Rating Event
On Tuesday, ECN announced that it has initiated a review of strategic alternatives, including a review of funding and capital relationships. The company postponed the investor day and announced that it will report Q4/22 earnings on March 22, 2023.
Impact: MIXED (Potential to realize underlying value immediately; against deteriorating backdrop for wholesale funded institutions)
When ECN announced the sale of Service Finance (SF) to Truist in Q2/21, we postulated that the decision to sell in part reflected the banking sector's significant liquidity and low loan growth. SF was particularly attractive because originations were growing and loans were high quality. Management stated that Triad was in a similar position and that a U.S. lifeco would be more logical because of the terms of loans (nine years for manufactured housing) and was clear that a sale was not likely in the next 18 months. It has been ~19 months since the SF announcement.
Looking at today's environment, the loans originated by MH and RV&M remain high quality, in our view, and very likely of significant interest to large financial institutions. However, bank liquidity is not as strong today (deposit run-off), funding costs are rising (higher deposit betas and higher wholesale funding costs), and credit risk is higher. We applied an SF forward multiple (20x) to the EBITDA of the segments, adjusted the sale proceeds for tax, and deducted corporate-level leverage to arrive at an estimated distribution to shareholders of ~$10.00/share. Taking into account a less favourable environment, including slower origination growth (and therefore a 15x multiple; and a 20% haircut to segment earnings), we arrive at a lower value of ~$6.50/share. It is also entirely possible that there is no deal, leaving a standalone value of ~$4.00/share (previous standalone target of $5.00/share). An equal weighted blend of the three valuations takes our target to $7.00.
TD Investment Conclusion
While a takeout contemplated above points to significant value for shareholders, the uncertainty as to the nature, timing, and value of the operating segments, as well as the evolving macro backdrop support taking our risk rating to HIGH from Medium. Our target price implies upside of 96%. We continue to rate the stock BUY.