CIBCEQUITY RESEARCH
May 23, 2022 Company Update
ECN CAPITAL CORP.
Positive Takeaways From Investor Marketing
Our Conclusion
We recently hosted management for a few days of investor meetings.
Overall, we felt the takeaways were generally positive and reinforced our
favourable impression of Q1 results. In this note we discuss a few
common themes and recent talking points on the stock. We see upside
potential to EPS guidance from a combination of strong organic growth and
accretive M&A activity, which supports our Outperformer rating and $7.50
price target.
Key Points
Theme #1: Near-term Likelihood Of A Tuck-in Sounds High. ECN has
been clear about its intention to pursue further tuck-in acquisitions. We feel
that management has established a good blueprint for M&A activity with a
clear set of criteria that the quality and merit of a transaction can be
measured against. The ideal target would consist of a company that: i) adds
another leg to the Triad platform; ii) remains focused on prime/super-prime
loans; iii) has secured a commitment from existing funding partners to take
volume; iv) has opportunities to scale the business via geographic or product
expansion; v) is acquired at a low P/E multiple, and; vi) produces positive
EPS accretion.
Theme #2: Organic Growth Continues To Gather Momentum. Approvals
increased 47% Y/Y at Triad and 83% at Source One in Q1, which was
arguably more encouraging than the beat on origination volumes.
Management indicated that April was a strong month as well. Manufactured
housing shipments are growing steadily despite challenges on the
manufacturing side of the industry including labour shortages, unpredictable
employee absenteeism due to COVID and building material supply
disruption. Funding partners have not tightened the credit box in response to
a deteriorating macro environment (which could have a dampening effect on
volume), and have only requested the pass-through of higher interest rates.
Theme #3: Positioned To Navigate A Challenging Environment. A
common line of questioning from investors was centered around the evolving
macro backdrop and what many anticipate to be a deteriorating economic
environment. Management highlighted that: i) credit losses are generally
non-recourse to ECN; ii) Triad and Source One are focused on prime/super-
prime loans; iii) liquidity remains high in the financial system and demand is
strong, exceeding their capacity to originate loans, and; iv) the operating
companies are not particularly interest rate sensitive.
Identifying Key Risks To The Outlook. In this note we also list and discuss
a few key risk factors unique to shares of ECN including the loss of (or
reduced) access to funding, an adverse shock to credit performance,
manufacturing supply chain issues, acquisition risk and land/zoning issues in
the manufactured housing industry. Overall, we consider these risks to be
reasonably low or manageable.