Element Fleet Management Corp.
Con te partiro: Strong EPS beat and significant 2023 guidance increase highlight retiring CEO’s last quarterly results
Our view: Very good Q1/23 results + significant 2023 guidance increase demonstrated why we thought EFN’s recent share price weakness was unwarranted (since the end of February 2023, EFN’s share price is down -8% vs. +2% for S&P/TSX Composite and +4% for S&P500). Q1/23 results marked the final quarter of a highly successful tenure for retiring CEO Jay Forbes and we think President and incoming CEO Laura Dottori-Attanasio can help sustain the positive momentum. EFN is delivering excellent 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 is our #1 high-conviction best idea as it has a rare combination of significant growth potential; discount valuation; and substantial FCF generation. At the same time, EFN offers strong defensive attributes and stands to benefit in a recession, high interest rate and/or high inflation environment. EFN’s shares trade at 13x NTM P/E (12x 2024E) and 9% NTM FCF yield (10% 2024E), yet we think an 18x P/E multiple (7% implied FCF yield) is justified. Increasing target to $28 (was $27), maintaining Outperform.
Key points:
EFN increased its 2023 guidance for almost all metrics, driven by F/X and positive business momentum and noted there could be further upside if OEM supply improves. 2023 Adjusted EPS guidance was increased to $1.26 – $1.31, a +12% increase at the mid-point vs. prior guidance of $1.12 - $1.17. Our prior 2023 Adjusted EPS forecast of $1.24 was at the high end of $1.17 consensus (range of $1.12 - $1.24), so EFN’s new guidance was higher than the high end of consensus. We note that of the $0.14 increase in EPS, $0.09 came from F/X, $0.035 came from stronger organic growth and $0.015 came from a better-than-expected tax rate. See Exhibit 1 for all guidance updates.
Q1/23 operating EPS of $0.31 was ahead of our $0.28 forecast and $0.27 consensus (range: $0.24 to $0.29). The positive variance was driven by lower-than-forecast expenses and to a lesser extent, higher-than-forecast revenues and lower-than-forecast tax rate.
Q1/23 originations of $1.91B were right in line with our $1.91B forecast and ahead of consensus at $1.79B (range: $1.63B - $1.99B).
Q1/23 normalized revenue per vehicle under management (VUM) was $198, up +11% Y/Y from $178 in Q1/22 and continues to trend higher, which we think shows signs of progress in EFN gaining additional share of wallet with its existing customers.
Increasing target to $28 (was $27) on higher financial forecasts, maintaining Outperform.