ECN Capital Corp T.ECN.PR.C

TD 2 (Upgrade)

[retiredcf]

ECN Capital Corp.

(ECN-T) C$8.04

Q4/20: Moving to Solely P/E-based Valuation Approach Event

ECN reported Q4/20 adjusted operating EPS of $0.08 (our estimate: $0.08; consensus $0.08-$0.09), up 5% y/y. Originations of $728mm increased 34% y/y and were higher than our estimate of $712mm, reflecting strong results in both HI and MH. All figures in U.S. dollars, unless noted. ECN raised the dividend to C$0.12/ share annually, up 20%.

Impact: NEUTRAL

• HI earnings were up 28% y/y (materially better than our estimate). The quarter included a $2.4mm ($1.8mm after tax or $0.01/sh) write-off of California solar exposure. The significant earnings increase reflects 34% growth in both originations (51% excluding solar) and managed portfolios. The servicing margin increased to 226bps vs. our estimate of 170bps and 134bps last quarter. The increase reflects the partial wind-down of servicing concessions ECN gave to its funding partners in exchange for accelerated funding commitments. Dealer growth in January 2021 was 64% above the five-year January average, supporting the notion that take-share opportunities remain strong for 2021. Make-share opportunities (adding new manufactures across verticals) also remain promising for 2021 (eg. big-box retailer in Q2/21).

• MH earnings were up 36% y/y (in line with our estimate), reflecting growth of 37% y/y in originations and mostly stable margins. Higher-margin core originations were up 38% y/y supporting better gain-on-sale margins in Q4/21. The land/ home opportunity ($150mm-$200mm in 2021E) generated $45mm in approvals in January. The early success in land/home and significant increase in the backlog, support our forecasted 45% growth in originations in 2021. Floor-plan assets stood at $114mm at Q4/20, down 2% from Q3/20. We forecast floor-plan loans of $120mm-$140mm in 2021.

  TD Investment Conclusion

  We arrive at our target price of C$10.00 (up from C$9.00) by applying 12.5x forward P/E (2022E EPS). Effective with this report, we are no longer using a blend of P/E and P/B. With the write-off of California solar and a further write-off of legacy airline assets, we believe the balance-sheet-light business model, supports a P/E-based valuation. Our BUY rating is supported by the upside to our target price, a reliable funding model, the resilience of HI and MH, and strong origination momentum.