Post by
retiredcf on May 04, 2023 9:51am
CIBC
EQUITY RESEARCH
May 3, 2023 Earnings Update
ELEMENT FLEET MANAGEMENT CORP.
Q1 Preview: Expecting Growth Story To Continue Uninterrupted
Our Conclusion
Element provided a positive update on Q1 funding on April 25, addressing
questions around the company’s ability to access markets during a liquidity
strained period. While access to liquidity is a positive, we still should assume
some negative margin impacts, at least for syndication. Even after taking
negative margin impacts into account, we expect the company will
comfortably hit its 2023 guidance. We like Element for the relative stability of
earnings in a period of elevated macro risks. No change to our $21 price
target and Outperformer rating.
Key Points
Q1 EPS estimate unchanged: We have updated our model for a stronger
USD, higher gains on sale, lower syndication revenue and higher operating
expenses. The net result has no impact on our Q1 EPS estimate of $0.27,
which is in line with consensus at $0.27.
Expecting strong Y/Y origination growth: Production volumes from
Element’s key OEMs suggest a 4% Y/Y increase. However, data points for
fleet volumes suggest that a higher proportion of production is being
allocated to fleets vs dealers. Our Q1 origination forecast of $1.8B implies
Y/Y growth of 26% and implies that the company will be on track to meet its
full-year guidance for growth of 13%-21%.
Servicing income to remain strong: We forecast servicing revenue to
come in at $144MM, up 9% Y/Y and down a modest 3% Q/Q, due to some
non-recurring revenue in the prior quarter. Overall servicing revenue should
be strong based on customer growth and economic activity. We expect 4%
annual growth in 2023.
Risks to syndication revenue: Element press released that it managed to
syndicate US$690MM in Q1, more than we would have expected. While we
have increased Q1 syndication volume, we have lowered our yield
assumption to account for intra quarter liquidity challenges. We forecast
syndication revenue of $13MM, down from $14MM a year ago. We expect
the company will hit its $3B-$4B syndication volume guidance for 2023, but
that there will be downward pressure on yields.
Higher expenses should not be a problem: We forecast expense growth
of 8% Y/Y. EFN has experienced higher expense growth in recent quarters,
however we are less concerned about wage and general cost inflation for the
company. EFN has shown its ability to pass-through higher costs to clients,
making it more resilient in (and even benefiting from) the current inflationary
environment.
Element is scheduled to report earnings after market close on May 9. The
conference call is scheduled for May 9 at 7:00 p.m. ET (1-800-319-4610).