TDOnce the smoke clears, the net result is an increase in target from $12.50 to $13.50 ($6.00 + $7.50 special dividend). GLTA
ECN Capital Corp.
(ECN-T) C$10.65
Q2/21: Selling SF for US$2bln; Paying C$7.50 Special Dividend Event
ECN reported Q2/21 adjusted operating EPS of $0.12 (our estimate: $0.12; consensus $0.12), up 73% y/y. Originations of $913mm increased 35% y/y and were in line with our estimate of $922mm, reflecting strong results in both HI and MH. All figures in U.S. dollars, unless noted.
ECN announced the sale of its largest operating unit, Service Finance for $2bln in an all-cash deal to Truist Bank. In 2020, SF accounted for 50% of ECN's pretax, pre-corporate expense adjusted operating income. While we find the transaction surprising (SF recently announced numerous new promising programs), the purchase price demonstrates that the private market values strong asset originators well above public market valuations.
Impact: POSITIVE
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The net after tax proceeds of $1.5bln will be distributed in the form of a special dividend of C$7.50 to shareholders (~70% of ECN's share price) following the closing of the sale in Q4/21. SFC management is joining Truist. ECN paid $309mm for SF in September 2017. Applying a tax rate of 20% to our 2022 estimated pretax earnings, we estimate that the business was valued at 18x-20x. ECN has a non- compete clause with Truist (24 months in the U.S. residential home improvement market).
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The decision to sell SF, in part, reflects the banking sector's significant liquidity and low loan growth. SF was particularly attractive at this time because originations were growing very abruptly and the loans originated are high quality. While Triad is in a similar position, management appeared to suggest that a lifeco would be a more logical buyer (tenor of the loans) and that a sale is not likely in the next 18-24 months.
TD Investment Conclusion
We arrive at our target price of C$6.00 by applying a 16.0x P/E multiple to our one-year forward EPS estimates (Q3/22E to Q2/23E). Additionally, the company is expected to pay a C$7.50 special dividend for the sale of SF in Q4/21. Our target P/E and BUY rating are supported by a reliable funding model, the resilience of the MH business model, strong origination momentum, and private value assigned to loan originators, as evidenced by recent transactions in this segment (including the 18x-20x paid for SF).