October 20, 2020
Element Fleet Management Corp.
Still taking my time to perfect the Fleet, and I still got love for the streets. It's the Element Fleet.
Our view: EFN is at an inflection point. Our call conviction is stronger. EFN should be a core holding in any portfolio and investors should buy before EFN reports Q3/20 (October 27). EFN is our best idea; increasing target +$2 to $17, maintaining Outperform. EFN has strong management, with President/CEO Jay Forbes successfully transforming EFN with EPS >50% since joining ~2 years ago. EFN is now focusing on growth (we forecast +15% 5-year EPS CAGR). EFN generates significant FCF (10% 2021E FCF yield). Post-transformation, EFN can now return a substantial amount of FCF via dividends/share buybacks.
Key points:
Why is this a Fusion report? Differentiated and Actionable. We address several key aspects of the EFN story that we don’t think have been given enough consideration (5-year outlook with Upside/Downside scenarios; quantifying how much in dividends/buybacks with the transformation complete; why a 12x P/E is way too low).
5-year outlook (with Upside/Downside scenarios): (1) +15.2% EPS CAGR (implied +19.1% Upside, +11.4% Downside); (2) 17.4% ROE in 2025 vs. 11.5% today (implied 20.3% Upside, 15.1% Downside); and (3) ~$8/share in cumulative FCF, driving ~$2.75/share in dividends (+31% CAGR, 40% payout ratio), ~$800MM in buybacks and redemption of prefs/converts.
Mispriced stock: we think the share price hasn’t kept pace with turnaround and growth potential: (1) valuing EFN’s Services segment at Fleet Services P/Es (~18x), EFN’s share price implies a 6.1x (or lower) P/E for EFN’s Financing segment, which we think is way too low. Using 10x for EFN’s Financing segment equates to +16% to the current share price (Exh. 14/15); and (2) we believe buying EFN’s shares today generates a 5-yr IRR of +20%, assuming a 15x P/E in 2025 (vs. 12x today).
We think EFN is a hidden gem, in part as its competitors are privately-held. We think EFN/the fleet industry are generally not well known to investors, particularly those outside of Canada. EFN is the largest player in what we think is an attractive industry (high barriers to entry, favorable competitive landscape, defensive attributes, high FCF generation). We believe EFN offers investors an attractive blend of: (1) growth; (2) defensive attributes; (3) multiple potential positive catalysts; and (4) attractive valuation.
We think COVID-19 likely created substantial growth opportunities to win new clients (e.g., companies dealing with lower revenues/higher costs and governments seeing ballooning deficits/debts) as EFN could save them ~20% on fleet costs. We think our forecasts could be conservative if EFN is successful penetrating self-managed, mega fleet and international markets. Furthermore, we think Amazon is EFN’s highest profile client and that there could still be significant growth from this relationship.