Element Fleet Management Corp T.EFN.PR.E

RBC 2

[retiredcf]

They raise their target again and their upside scenario target is $37.00. GLTA

August 8, 2023

Outperform

TSX: EFN; CAD 21.75

Price Target CAD 30.00 ↑ 29.00

Element Fleet Management Corp.

FINALLY...the originations have come BACK to EFN: strong Q2/23 results

Our view: Q2/23 results reaffirmed why EFN is our high-conviction #1 best idea. We think investor expectations were for a strong quarter and we think EFN exceeded it. In particular, the key takeaway for us was originations that were well ahead of our forecast and consensus, giving greater evidence that OEM production is normalizing, which we view positively as it gives greater visibility regarding originations in the near-term. While we think further signs of material improvement in originations leading to continued strong EPS growth are a positive catalyst for the stock over the near-term, another key catalyst may come in later 2024 as EFN plans to complete the redemption of its remaining preferred shares + convertible debt and then with a “clean” capital structure, high FCF, low capex and no material M&A intentions, this could result in a substantially higher dividend and higher share buyback activity. We still view the shares as undervalued and increase our price target to $30 (was $29) and maintain our Outperform rating.

Key points:

Q2/23 operating EPS of $0.33 was a penny above our $0.32 forecast and ahead of $0.31 consensus (range: $0.28 to $0.32). Relative to our forecast, service revenues and net financing income were solidly ahead, partly offset by lower-than-forecast syndication revenues (lower-than- forecast syndications + syndication yield) and marginally higher-than- forecast compensation expense.

Q2/23 originations of $2.54B were well ahead of our $$2.16B forecast and ahead of consensus at $2.13B (range: $2.01B - $2.32B) and compares to Q/Q at $1.91B and Y/Y at $1.91B.

Q2/23 normalized revenue per vehicle under management (VUM) was $215, up +14% Y/Y from $189 in Q2/22, reaching a new high since the metric was first disclosed in Q1/22 and continuing to trend higher. We think the positive upward trend shows signs of progress in EFN gaining additional share of wallet with its existing customers and new customer wins.

Increasing price target to $30 (was $29) on higher financial forecasts and maintaining our Outperform rating.

Conference call tomorrow (Wednesday) at 7:30am ET; dial in: 1-800-319-4610 (link to webcast on the company's website).