TSX:ECN - Post Discussion
Post by
retiredcf on Aug 11, 2021 10:11am
RBC
Outperform
TSX: ECN; CAD 10.65
Price Target CAD 12.50 ↑ 12.00
ECN Capital Corp
The Magnificent Seven (and 50 Cent): buy low, sell really high
Our view: The US$2.0B sale of Service Finance (SFC) was an unexpected, but positive surprise (acquired for US$0.3B in 2017). ECN still has attractive platforms for growth with Triad and Kessler. Although ECN did not rule out making a platform acquisition to replace SFC, it appears ECN will be focused on organic growth at Triad and Kessler, including possible product expansion. We maintain our Outperform rating, but increase our target to C$12.50 (was C$12.00) comprised of a pro-forma valuation of Triad/Kessler of C$5.00 plus the C$7.50 special dividend. Taking the current C$10.65 share price minus the C$7.50 special dividend implies a current value of C$3.15 for Triad/Kessler. Coupled with our revised dividend forecast (see details below), this implies an almost +50% total return for the pro-forma business (Triad/Kessler).
Key points:
ECN entered into a definitive agreement to sell SFC to Truist Financial for US$2B. The deal is expected to close in late 2021, subject to customary closing conditions. Following closing of the transaction, ECN intends to pay a special dividend of C$7.50/share (US$1.5B of the net proceeds; the remaining US$0.5B is earmarked for taxes, transaction costs and some debt repayment). ECN estimates it will have ~US$350MM of debt after paying the special dividend. We understand the special dividend is likely to have a significant return of capital component, with the exact amount to be determined. There is a 24-month non-compete for ECN regarding the U.S. residential home improvement loan market.
Q2/21 operating EPS (basic) of US$0.12 was right in line with our forecast,
with results at SFC below our forecast and results at Triad and Kessler above our forecast.
Updated 2022 guidance: (1) consolidated EPS of US$0.25-$0.30, which assumes a 20% tax rate and 245MM shares outstanding; (2) Triad US$1.25- $1.50B of originations and US$57-$65MM of pre-tax adjusted operating earnings; and (3) Kessler US$52-$59MM of pre-tax adjusted operating earnings.
Updated 2021 guidance: (1) Triad US$1B of originations was unchanged but pre-tax adjusted operating earnings increased to US$43-$46MM (was US$39-$44MM); and (3) Kessler pre-tax adjusted operating earnings were lowered at the high end to US$46-$49MM (was US$46-$52MM).
Other key takeaways: (1) ECN’s Board plans to review the level of the quarterly dividend given ECN will be much smaller post the SFC sale, but intends to still pay a dividend. The payout ratio in recent years was ~25%, so based on our EPS forecasts, this implies a new dividend of ~C$0.08/ share annualized vs. C$0.12 currently; (2) ECN plans to renew its share buyback program to purchase up to 10% of common and preferred shares; (3) ECN’s CEO extended his contract through 2025; and (4) ECN will reduce its senior credit revolver to US$700MM (from US$1.1B) maturing in 4- years, presumably to right size for a smaller business post-SFC sale.
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