March 6, 2023
Element Fleet Management Corp.
I...want to Rock And Roll All Nite...and every day
Our view: In his penultimate quarter as CEO, Jay Forbes presided over a major turnaround. EFN's share price was just $4.64 when he was named CEO in May 2018. Almost 5 years later (including a pandemic), the stock is almost $20. EFN is delivering strong fundamentals winning new customers, cross-selling existing clients additional fleet services with 2023 results that should be further bolstered by finally having improved OEM production. EFN remains our #1 high-conviction best idea as it has a rare combination of significant growth potential, discount valuation, and substantial FCF generation that we expect to be used for share buybacks and dividend increases plus redemption of the remaining preferred shares and convertible debt issue (low capex requirements, M&A unlikely). At the same time, EFN shows strong defensive attributes and stands to benefit in a recession, high interest rate and/or high inflation environment.
Key points:
Q4/22 operating EPS of $0.27 was ahead of our $0.26 forecast and $0.25 consensus (range: $0.22 to $0.28), which marks the 4th consecutive quarter of higher EPS vs. consensus. Higher-than-forecast net interest income and syndication revenues were partially offset by higher-than- forecast expenses.
Q4/22 originations of $1.84B were well ahead of our $1.45B forecast and consensus of $1.49B (range: $1.30B - $1.88B).
Normalized revenue per VUM in Q4/22 was $196, up +14% Y/Y from $172 in Q4/21 and up +5% Q/Q from $187 in Q3/22, which we think shows signs of progress in EFN gaining additional share of wallet with its existing customers.
2023 guidance was re-affirmed, with the exception of syndication volumes as EFN now is guiding to $3.0-$4.0B (was $4.0B to $4.5B), citing higher interest rates and less attractive syndication yields. What's directionally interesting to us is that given syndications typically result in higher revenues in the current period a lease is originated (vs. securitizing or funding via EFN's credit facility), that EFN still is leaving its other guidance metrics unchanged incrementally which suggests positive trends on originations, fleet services and/or NIM yields.
Increasing target to $27 (was $26) and maintaining Outperform rating. The increased target reflects slightly higher financial forecasts and the rolling forward of our valuation.
Conference call tomorrow (Tuesday) at 8:00am ET; dial in: 1-800-319-4610