TSX:EFN - Post Discussion
Post by
retiredcf on Nov 30, 2022 1:00pm
Even Better (RBC)
Their upside scenario target is $31.00. GLTA
Element Fleet Management Corp.
We use words like TCO, SCS, VUM. We use these words as the backbone of a life spent growing something: Investor day highlights
Our view: EFN’s inaugural investor day re-affirmed why it is our high- conviction #1 best idea and why we think it should be a core holding. The key takeaway for us was that there are substantial growth opportunities (cross-selling existing customers additional fleet services, market share wins, self-managed fleet wins, mega fleet wins, government wins) and while EFN needs to execute to capitalize on these opportunities, we think EFN’s execution so far on its growth strategy makes it likely it can succeed. We forecast a mid-teen EPS CAGR over the next 5 years but above-average execution could see our forecasts prove conservative in our view. We view EFN as a relative (perhaps absolute) winner in a recession, high inflation and/or high interest rate environment with the shares being defensive but also offering significant valuation upside when macro conditions improve driven by strong growth potential. We view the shares as attractively valued and maintain our Outperform rating, $26 target.
Key points:
Key takeaways
-
EFN estimates there is a $245MM annual net revenue opportunity from existing clients to cross-sell additional fleet services. This doesn’t include market share gains; utilization benefits (i.e., use of EFN’s supply chain network vs. non-EFN network vendors); inflation; self-managed fleet wins, etc. Put into context, current net revenues are ~$1B/year.
-
EFN estimates there is a ~$190MM annualized net revenue opportunity from market share wins.
-
In mega fleets, EFN said it is targeting the last mile delivery sector globally, noting it has 2 such clients in Australia/New Zealand and there are more in the pipeline. These are higher revenue potential/low probability type opportunities that tend to have longer sales cycles vs. other companies/governments that EFN otherwise targets.
-
EFN said it recently won a 2,800 vehicle U.S. federal government contract and intends to continue to target this segment.
-
EFN made significant investments in systems/technology which are improving customer service (e.g., clients can order vehicles themselves) and delivering cost savings to EFN (e.g., 126 automations into production since January 2020 with each generating ~$35,000/year in savings).
-
EFN reiterated that dividend growth should track FCF/share growth in the near term. In our view, in 2 years when all the preferred shares are redeemed and convertible debenture either converted or redeemed, EFN should be generating substantial cash flow that we believe would see significant sustained share buybacks and also likely a significantly higher dividend payout ratio, which is currently 25-35%.
-
On electric vehicles, while electric vehicles under management (eVUM) is still small (~25,000), EFN is experiencing an increasing number of clients doing pilot program launches (>50 clients).
-
EFN has won 77 new clients from competitors so far in 2022, representing 33,100 new vehicles under management (see Exhibit 1 below for details).
-
EFN’s client retention rate is 98.6% in 2022 YTD, slightly higher than historical, but much better than the trough 94.9% retention rate in 2018 when President & CEO Jay Forbes joined EFN to engineer what is now a very successful turnaround with strong execution so far of the growth strategy.
-
On syndication, EFN believes it could syndicate potentially $5B of vehicle leases vs. ~$3B in 2022 and that EFN now has 32+ syndicated lease buyers vs. just 6 in 2018). Furthermore, syndication has expanded from just the U.S. to Canada and EFN is evaluating expanding into Mexico.
Be the first to comment on this post