This was TD 2Q - soon we will have 3QECN Capital Corp. (ECN-T) C$5.10 Q2/20: Troubling Signs in the Qtr.; Remain Optimistic about 2021
Event ECN reported Q2/20 adjusted operating EPS of $0.07 (in line with our estimate and consensus of $0.07) and flat with Q2/19. Prior to dropping guidance last quarter, management had guided to EPS of $0.10-$0.11. Originations of $676mm increased 13% y/y, and were higher than our estimate of $634mm. Originations, applications, and approvals have shown strong momentum in June and July as shelter-at-home guidelines have been relaxed across the U.S. and as SF added new dealers at an accelerated pace. All figures in U.S. dollars, unless noted. Impact: MIXED HI earnings were down 8% y/y and were slightly higher than our estimate. The decline reflects a sharp decline in the servicing margin (servicing revenue to average managed assets) to 142bps (versus a trailing 3-quarter average of 238bps), reflecting what management characterizes as a temporary reduction in servicing fees for 2020 to compensate funding partners for the higher credit risk associated with COVID-19. In return, ECN received accelerated funding commitments from its partners. ECN added new funding partners, expanded funding capacity, and renewed funding commitments into 2021 in advance of contractual maturities. We reduced our servicing margin at SF in Q4/20 to 150bps and maintained our 2021 margin forecast of 225bps. Management stated that SF is fully funded for 2021 originations at historical margins. Management revised SF 2020 adjusted pretax guidance to $67mm-$72mm ($78mm-$83mm before guidance was withdrawn last quarter) and originations of $1.9bln-$2.1bln (consistent with previous guidance). MH earnings were down 4% y/y (slightly lower than our estimate), reflecting a 4% y/y decline in originations. Management revised MH 2020 adjusted pretax guidance to $30mm-$34mm ($31mm-$35mm before guidance was withdrawn last quarter) and originations of $650mm-$700mm (slightly below previous guidance). TD Investment Conclusion Our C$6.00 target price (unchanged) is based on a P/B approach to valuation. Applying 1.5x P/B, an appropriate multiple in the context of the forecast ROE and the balance-sheet-light business model, we arrive at our target price of C$6.00. Our BUY rating is supported by the upside to our target price, a reliable funding model, and the resilience of HI and MH.