Element Fleet Management Corp T.EFN

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Their upside scenario target is $31.00. GLTA

January 5, 2023

Element Fleet Management Corp.

You Make Me Wanna make you our #1 best idea for 2023...this is what you do

Our view: EFN is our #1 high-conviction Best Idea for 2023 and we believe EFN should be a core holding in any portfolio. EPS growth is accelerating, driven by new customer wins and cross-selling existing clients additional fleet services. We think EFN’s shares can be a relative (and potentially absolute) outperformer in not only a recession, high inflation and/or high interest rate scenario but also in a market recovery. Maintaining Outperform rating, $26 target.

Key points:

Please see our 2023 Outlook report also published today “2023 Canadian Diversified Financials Outlook: Kind of like finding sharks with laser beams attached to their heads” for more details on Element Fleet and our outlook for our sector in 2023.

Why EFN is our #1 best idea:
• EPS growth has been accelerating (even despite continued OEM

production issues limiting originations), driven by new client wins (wins from competitors + self-managed fleet wins) and cross-selling existing clients additional fleet services. We think EFN can generate a mid-teen EPS CAGR over the next 5 years.

• Originations should significantly improve in 2023 further improving EPS growth, even in a recession as clients have had minimal fleet replacements for the past 2+ years resulting in significantly higher costs of fleet ownership and are likely to have high demand for new vehicles to reduce fleet ownership costs. We note that with OEM production gradually improving, if economic data continues to weaken, this could see a reduction in consumer new vehicle demand and therefore see OEM’s shift sales to vehicle fleet managers like EFN which have high vehicle demand from clients, something that appears to be happening based on recent U.S. auto sales data.

• We think the stock can be a relative (potentially absolute) outperformer regardless of the capital markets/economic environment. We believe EFN is less sensitive to a recession, high inflation and/or high interest rates. In a recession, we think clients would still have strong demand for new vehicles for reasons noted above and that EFN could still win new clients and cross-sell more fleet services as companies look for cost savings. In a high inflation environment, EFN benefits as most of its revenues benefit (e.g., higher vehicle prices = higher financing revenue; many fleet services revenues are based on value/price. Even fleet services priced on a per unit/transaction basis have inflation-based adjustments). EFN effectively locks in its net interest margin (NIM) yield at origination, minimizing the impact of interest rate movements.

  • Attractive valuation given significant FCF generation, trading at P/Es of 15.5x 2023E and 13.0x 2024E and FCF yields of 8.0% 2023E and 9.5% 2024E. We think EFN should eventually trade at a high- teen P/E multiple.