ECN Capital Corp.
(ECN-T) C$10.63
Q2/21 Outlook; Introducing 2023E EPS and Raising Target Price Event
ECN reports Q2/21 results on August 11. We forecast Q2/21 adjusted EPS of US $0.12, in line with guidance of US$0.11-US$0.13 and consensus of US$0.12.
Impact: NEUTRAL
We forecast pre-tax adjusted operating income from HI of US$24.4mm, up 67% y/y, reflecting strong originations and much higher servicing margins and higher margins generally. We expect HI originations of US$667mm, up 30% y/y, reflecting the new one-stop platform and strong growth in HVAC and windows/doors. The improvement in gain-on-sale margins reflects a shift away from lower-margin solar originations. Additionally, starting in Q2/20, HI reduced servicing fees to funding partners in return for accelerated and larger funding commitments ahead of contractual maturities. Accordingly, in Q2/21, we expect pre-tax earnings growth to accelerate materially. Last quarter, HI signed an agreement with Sam's Club to provide home improvement services through its dealer and funding partners. While our 2022 estimate does not reflect the benefit of this new arrangement, we believe the impact could be meaningful. We expect more information on this arrangement on the Q2/21 call.
We forecast pre-tax adjusted operating income from MH of US$12.0mm, up 66% y/ y, reflecting 56% y/y growth in originations and improving margins. We forecast MH delivering a very strong 2021 with origination growth of 49%, supported by several new initiatives discussed at the February 5 investor day (link).
We forecast Kessler earnings increasing 24% y/y, reflecting the gradual improvement in partnership and marketing platforms. The pipeline of potential transactions suggest that this business should show solid momentum in the near term.
TD Investment Conclusion
We arrive at our target price of C$12.50 by applying 14.0x forward P/E (Q2/22E to Q2/23E EPS). Our target P/E and BUY rating are supported by a reliable funding model, the resilience of the HI and MH business models, and strong origination momentum. Strong YTD performance in the stock reflects excellent execution on the growth initiatives as well as challenges at certain of ECN's competitors. Over the last 18 months (throughout the pandemic) ECN's business model has proven to be very resilient. For this reason, we believe it is appropriate to reduce the company's risk rating to medium (from high).