January 5, 2023
ECN Capital Corp
Reducing target on reduced earnings visibility
Our view: We think ECN’s share price could be constrained in early 2023 pending greater clarity on the macro environment. Specifically, with economic data weakening, it’s unclear how this will impact demand for manufactured housing, boat and RV loans and also ECN’s appetite to complete acquisitions of boat/RV lending companies. Based on our view of reduced earnings visibility, we lower our target to $4 (was $5), but maintain our Sector Perform rating. While we think ECN’s share price may be constrained in early 2023, we think when early signs of a sustained market recovery appear, ECN’s share price could experience significant valuation upside.
Key points:
Please see our 2023 Outlook report also published today “2023 Canadian Diversified Financials Outlook: Kind of like finding sharks with laser beams attached to their heads” for more details on ECN Capital.
We are decreasing our 12-month price target to $4/share (was $5). Our lower price target primarily reflects our lower 8.5x P/E (was 11x) target multiple, reflecting reduced earnings visibility as a result of the weakening macro environment.
Here is what we are focusing on for 2023:
• 2023 guidance: ECN has guided to US$0.25-$0.30 EPS in 2023 (excluding
acquisitions), but has disclosed it believes M&A could add an additional US$0.06-$0.12. ECN plans to provide updated 2023 guidance early this year, so it will be important to see if this changes and any other guidance and/or commentary impacting their 2023 outlook.
• M&A: ECN has talked about previously signed letters of intent plus appetite to further consolidate the boat/RV loan finance industry. Given the current economic environment, it’s unclear if that appetite has changed; what transaction multiples have been agreed to for previous LOIs and what future acquisition multiples might look like.
• Originations: ECN has talked about strength in each of its business lines, but it’s unclear what impact a weaker economy and high interest rates will have on originations in each of ECN’s business lines.