ECN Capital Corp T.ECN.PR.C

TD

[retiredcf]

ECN Capital Corp.

(ECN-T) C$6.67

Q2/22: Strong MH Results; Announced Acquisition of IFG Event

ECN reported Q2/22 adjusted operating EPS of $0.09, up from $0.05 last year and in-line with our $0.09 estimate (consensus: $0.084) and guidance of $0.08-$0.09. Reported EPS was $0.03 with the difference relative to adjusted EPS being stock- based compensation, amortization of intangibles, and transaction costs.

ECN announced the acquisition of Intercoastal Financial Group (IFG) to complement Source One and has an LOI on four additional acquisitions. Note, our estimates do not reflect the IFG (or additional) acquisition(s).

Impact: POSITIVE

• ECN acquired IFG for $75mm on July 1 ($55mm at close and additional $20mm over time), representing ~6x 2023E adjusted operating income (Source One ~7x). The deal is expected to be $0.06/share accretive to 2023E EPS ($12-$14mm of adjusted operating income). IFG originates superprime marine & RV loans (mostly marine), expanding ECN's footprint in this product to nationwide (including Source One). Similar to Source One, the loans have no recourse (beyond six-month chargeback period) and no principal risk. Management sees a low-risk path to $30-$40mm of adjusted operating income at IFG.

• Triad reported pretax adjusted income of $24.2mm, up 85% y/y and much higher than our forecast of $19.9mm, reflecting strong originations growth and higher margins (mix), partially offset by higher expenses. Originations of $381mm were up 45% y/y and in-line with our estimate. Servicing and origination revenue was stronger than expected, while operating expenses were also higher. Triad's leading position in affordable housing is particularly well-situated as rising housing costs shift demand away from traditional housing options to Triad's financing options.

  TD Investment Conclusion

  Our target price of C$8.50 is based on a 15.5x P/E multiple applied to our one- year forward EPS estimates (Q1/23E to Q4/23E). Our target P/E and BUY rating are supported by strong earnings momentum, 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. Our adjusted EPS estimates imply growth in 2022E and 2023E of 91% and 25%, respectively. Very strong growth in 2022 reflects the acquisition of Source One and 47% growth in originations in MH (number of new lending initiatives).