ECN Capital Corp.
(ECN-T) C$7.60
Q4/20 Outlook: Strong Momentum in Originations Event
ECN is expected to report Q4/20 results on February 25. We forecast Q4/20 adjusted EPS of US$0.08; in line with consensus of US$0.08-US$0.09.
Impact: NEUTRAL
We forecast pre-tax adjusted operating income from HI of US$18mm, up 4% y/ y reflecting strong originations offset by lower servicing margins. We expect HI originations of $524mm, up 32% y/y reflecting strong growth in HVAC and windows/ doors as several competitors have retrenched. The significant difference between originations and pre-tax earnings growth reflects the lower servicing fees. Starting in Q2/20, HI reduced servicing fees to funding partners in return for accelerated and larger funding commitments ahead of contractual maturities. Our pre-tax earnings forecast for HI reflects a servicing margin (servicing fees-to-average managed assets) of 170bps, down from ~250bps in 2019, but up sequentially by ~40bps.
We forecast pre-tax adjusted operating income from MH of US$8.6mm, up 32% y/ y reflecting 30% y/y growth in originations and improving margins. Last quarter, the gain on sale margin (gains on sale-to-originations) declined materially as COVID-19 resulted in a higher proportion of originations remaining on balance sheet. Our estimate reflects the gain on sale margin returning to normal in Q4/20. We forecast MH delivering a very strong 2021 with origination growth of 45% supported by a number of new initiatives as discussed in our Investor Day note dated February 5 (link).
We forecast Kessler earnings dropping 1% y/y and 12% q/q, reflecting the absence of a large loan portfolio transaction on the business' credit card investment management platform. The pipeline of potential transactions suggest that this business should contribute materially to 2021 earnings.
TD Investment Conclusion
We arrive at our target price of C$9.00 by applying 11.5x forward P/E (2022E EPS) and 2.0x P/B, an appropriate multiple in the context of the forecast ROE and the balance-sheet-light business model, to Q4/21E BV/share. Our BUY rating is supported by the upside to our target price, a reliable funding model, the resilience of HI and MH, and improving origination momentum. Although the capital-light model supports valuing the stock on a P/E basis, we are hesitant to do so until we see consistent BV growth and fewer non-core charges.