November 10, 2022
ECN Capital Corp
Q3/22 EPS in line, but reducing target to reflect organic EPS
Our view: Although Q3/22 EPS was in line with our forecast, there were two lingering questions/issues regarding ECN’s performance over the next year. First, if ECN is articulating strong customer demand in all its business segments, why was 2023 organic EPS guidance cut to US $0.25-$0.30 (was US$0.30-$0.35)? Second, the timing and how accretive potential acquisitions might be is unclear. Consequently, we have revised our valuation to reflect only organic EPS, resulting in our 12-month target declining to $5.00/share (was $6.50), but we maintain our Sector Perform rating.
Key points:
Q3/22 adjusted operating EPS (basic) of US$0.05 was in line with our US$0.05 forecast and consensus (range: US$0.04 – US$0.09). Although EPS was in line with our forecast, operating income at the Manufactured Housing segment (Triad) and the Marine and RV Finance segment (Source One and IFG) were both below our forecast, offset by $3.4MM of revenue from F/X agreements.
ECN maintained its 2023 adjusted EPS guidance of US$0.36 to US$0.42. However, it provided new disclosure on the composition of the EPS guidance. ECN's new 2023 EPS guidance assumes organic EPS of US$0.25 to US$0.30 (ECN indicated the prior assumed organic EPS was US$0.30 to US$0.35). In addition, ECN is guiding to US$0.06 to US$0.12/share in M&A- related EPS in 2023, although the Company indicated this would depend on when and how many potential acquisitions are completed.
On its M&A strategy, ECN said it is in advanced discussions with 3 Marine & RV finance platforms which in aggregate could add US$5MM to US $7MM in pre-tax adjusted operating income in 2023 and that there were several potential targets with which ECN is in various stages of discussion.
Other key takeaways: (1) Triad’s Q3/22 origination volumes were negatively impacted by Hurricane Ian, delaying US$20MM – US$40MM of originations to Q4/22 or Q1/23; and (2) ECN continues to see positive demand trends in its Marine and RV finance business, but noted further macro deterioration could dampen consumer demand and origination volumes.
Decreasing 12-month price target to $5.00/share (was $6.50), but maintaining our Sector Perform rating. Introducing 2024 forecasts. Our lower target reflects our financial forecasts now reflecting just organic growth (our prior forecasts previously incorporated a modest level of M&A activity, but our decision to remove this from our forecast is driven by the uncertainty on the timing, number and financial impact of potential acquisitions).