ECN Capital Corp T.ECN.PR.C

TD

[retiredcf]

So factoring in the special dividend, their target is $13.50. GLTA

ECN Capital Corp.

(ECN-T) C$10.81

Q3/21 Outlook Event

ECN reports Q3/21 results on November 10. We forecast Q3/21 adjusted EPS from continuing operations of US$0.05. Including HI, we estimate EPS at US$0.16, in line with guidance of US$0.15-US$0.16 and consensus of US$0.13. We are also resuming coverage on ECN.

Impact: NEUTRAL

Last quarter ECN announced the sale of Service Finance for $2bn to Truist. The deal is expected to close in Q4/21 and generate net after tax proceeds of $1.5bn, all of which will be distributed in the form of a special dividend (C$7.50/share). We expect SF to report pre-tax adjusted operating income of US$30.9mm, up 67% y/y reflecting 25% growth in originations and much stronger margins.

We forecast pre-tax adjusted operating income from MH of US$15.5mm, up 73% y/ y, reflecting 58% y/y growth in originations and stronger margins. The improvement in margins reflects lower gain on sale margins in Q3/20 as the company originated loans on behalf of recently signed partners. The loans were subsequently sold under a portfolio sale agreement rather than through the normal course. We forecast MH delivering a very strong 2021 and 2022 with origination growth of 48% and 30%, respectively, supported by several new initiatives including the land/home opportunity. Additionally, last quarter, Triad was approved as an FHA lender which we believe should lead to incremental origination volumes in 2022 (product launch Q4/21).

We forecast Kessler pre-tax adjusted operating earnings of US$11.8mm, up 2% y/ y, reflecting the gradual improvement in partnership and marketing platforms. While marketing services make a modest revenue contribution, we saw solid momentum in this line in Q2/21. The pipeline of potential transactions and increased card usage suggests that Kessler should show solid momentum in 2022.

TD Investment Conclusion

We arrive at our target price of C$6.00 by applying a 16.0x P/E multiple to our one-year forward EPS estimates (Q3/22E to Q2/23E). Additionally, the company is expected to pay a C$7.50 special dividend for the sale of SF in Q4/21. Our target P/E and BUY rating are supported by a reliable funding model, the resilience of the MH business model, strong origination momentum, and private value assigned to loan originators, as evidenced by recent transactions in this segment (including the 18x-20x paid for SF).

[toppgunn]

What is the best choice for a shareholder?  Hold and collect the 7.50 dividend and ECN to correct to an undetermined price OR Sell at current prices to lock in a known profit? This is proably why ECN has been for the most part rangebound since the last financials.    

[retiredcf]

toppgun - I would definitely hold it or add more.  The SP has already over corrected down to an equivalent of $3.65 once you subtract the dividend and most analyst targets for the remainder of the company range between $5.50 and $6.00.  GLTA

[Blueswin]

I think the only negative to adding at this point is having to claim the large div. as a profit. The possible positive is that you might get the shares now at $3.65 & the price might be higher after the div. is paid or it might be lower who knows.

[pierrelebel]

Blueswin wrote "...only negative to adding at this point is having to claim the large div. as a profit...." "negative" ???? Much depends on your personal circumstances. If the shares are held in a trust account (RRSP, TFSA, RRIF, etc...) there is no tax issue. If the shares are held directly, depending on your age, province of residence and other income, you may benefit

[Blueswin]

Yes you are right held in any acounts (TFSA, RRSP, ect) there is no tax implications. It is only an issure in the open trading account. I guess having to claim the $7.50 per share as income is not a benefit to me personnally because I don't have any tax losses this year. Once you take the $7.50 out of todays share price you would have around $3.40 a share price (present price $10.90). But it

[pierrelebel]

Blueswin wrote "... I guess having to claim the $7.50 per share as income is not a benefit..." ???? Not quite. If you reside in Canada the $7.50 dividend is NOT "income" but "eligible dividend". In Ontario for example it would be basically tax free if your income is under $45,000 (rates vary by province) as the "dividend tax credits" (both federal and

[Blueswin]

I am sorry that I didn't use the right terminology. I make more than $45 thousand a year & realize that the whole amount of the div. would not be taxed. Obviously you think it is a good idea to buy now & collect the div. where I will wait until the dust settles & the div. is paid out. Both are equally good options.

[TimeScape]

Just announced the return of capital portion of the dividend will be about $4.15, so a special dividend of about $3.35.  Unless your income is very low this year, it probably doesn't make sense to buy ECN now in a taxable account, because you will be converting some of your capital into taxable income, albeit offset somewhat by the DTC.  Of course, you would have a capital loss you

[Blueswin]

Thank you for your thoughts! This is why I was thinking of waiting to buy shares after the div. payment of $7.50.

[toppgunn]

The scenario on the dividend payout does seem a bit complicated.  Myself, buying ECN in the 3ish range back in April 2020 will continue to hold unless this becomes negatively effected.  My experience this stock could either continue to trend upwards and on the contrary take a butt kicking.  The markets have been postive and belief  ECN will continue to trend up on SUM of the

[TimeScape]

They stated the dividend will be paid in December. If you have a $3 cost base for ECN, this is what will happen if you hold ECN in a taxable account - estimated numbers.  The dividend portion of the distribution, call it $3.35 a share, will be a taxable dividend.  You will get the dividend tax credit, which will reduce your tax payable on the dividend somewhat, depending on how high

[toppgunn]

Appreciate the answer as can be a complicated scenario to understand.  This seems to be the normal when a company restructures or changes similar to this type of company format.    

[pierrelebel]

Unfortunately the decision to consider a large portion of the $7.50 distribution as "return of capital" removes the advantage I had planned with a $7.50 "eligible" dividend. Since I hold the shares in a taxable account, I will simply sell them in the next few days and report a capital gain. End of story - for me. I may look at ECN again in 2022 (after distribution).

[snootchybootchy]

Thanks for this information.  Anybody know how to calculate the cost base of ECN if you received shares of ECN when it was separated from Element Financial? 

[TimeScape]

If you held Element when it was split into 2 companies the allocation of your original Element ACB is 79.44% to Element Fleet and 20.56% to ECN Capital, according to this news release from Element. 2016-10-19-NR.pdf (ecncapitalcorp.com)