Element Fleet Management Corp T.EFN

RBC Report

[retiredcf]

Their upside scenario target is $38.00. GLTA

February 28, 2024

Outperform

TSX: EFN; CAD 23.07

Price Target CAD 31.00

Element Fleet Management Corp.

We are NOT on a break: why we think EFN remains mispriced

Our view: With EFN’s share price near its historical high, some investors might think the stock is “expensive” vs. historical (we strongly disagree and explain below) and wonder how much more upside there is in the stock. Regardless of whether Rachel and Ross were on a break, we think EFN is not on a break and can continue its positive momentum. EFN’s P/E is 15.6x 2024E and 13.4x 2025E with a FCF yield of 7.5% 2024E and 9.0% 2025E. We think this is “cheap” for two reasons. First, we forecast a 15% EPS CAGR over the next 5 years and coupled with a 20% dividend CAGR and share buybacks of 3.5%-4.5% per year, this increases ROE from 15% to 24% in 2028E. Second, we think EFN’s shares can outperform in potentially any scenario (recession, recovery/rally) with EFN having strong fundamentals with high growth potential; multiple potential catalysts; strong defensive attributes; and an attractive valuation. EFN is our #1 high-conviction best idea. Maintaining Outperform, $31 target. Conference call Wednesday at 8am EST; dial in: 1-800-319-4610 (link to webcast on EFN’s website).

Key points:

Why we caution investors comparing EFN’s current P/E multiple vs. historical: (1) pre-Q4 2016, the Company was “Element Financial”, a very different business that included Commercial & Vendor Finance, Aviation Finance and Railcar Finance and had other factors to consider that we don’t think are relevant to looking at EFN today. Element Financial split into two companies at the start of Q3/16; (2) from Q4/16 to H1/18, Element Fleet had significant challenges under a former management team regarding integrating prior acquisitions and also the realization that post the Element Financial split, Element Fleet had been given numerous non-Fleet assets, one of which was a JV called 19th Capital that had caused significant financial damage to EFN, which contributed to EFN’s share price plummeting; and (3) in H1/18, the new management team came in (with significant Board changes) to turn around the business, which was ultimately successful, but took over 1 year just to stabilize the business and eventually, EFN’s growth momentum started to emerge, but was constrained by both the pandemic and the subsequent OEM production shortage. 2024 should finally see Element Fleet more clearly demonstrate its growth potential given its positive fundamentals and OEM production finally having normalized. Coupled with our growth forecasts noted above, we view EFN’s shares as mispriced. 

We have a neutral view on Q4/23 results. Q4/23 operating EPS of $0.33 was slightly below our $0.35 forecast and a penny below $0.34 consensus (range: $0.32 to $0.36) as $0.01 was a higher tax rate (26% vs. 24% forecast) and $0.01 from marginally lower revenues and slightly higher OpEx. While EPS was slightly below forecast, we think the key is 2024 guidance was maintained and we re-iterate, we think 2024 EPS guidance is conservative.