Element Fleet Management Corp.
(EFN-T) C$18.86
Constructive Outlook Reinforced
Event
Investor Day
Impact: SLIGHTLY POSITIVE
In our view, the investor day provided visibility towards the executive depth behind CEO Jay Forbes and CFO Frank Ruperto (12 presenters in total). Key themes on display were management's confidence in the growth outlook; the recession- resilient positioning of the business; the benefits of a capital-lighter model; capital return plans; and transitioning to electric vehicle (EV) fleet management. We have increased our target price to $22.00 (from $21.00) on a slightly higher multiple (1.0x higher on 2023 P/E and 0.7x on 2023 P/FCF). We reiterate our BUY rating.
Growth opportunities and scale benefits were clear themes. Management appears confident in its 2023 (6-9%) and medium-term (6-8%) revenue growth outlook. Element is looking to replicate the commercial success in Mexico (five- year revenue CAGR of 26%) across all geographies. It has been investing heavily towards upgrading the sales teams and adopting a hunter/farmer model.
'Hunters' are focused on stealing market share and penetrating the deep self-managed fleet market. Consolidation among fleet-management companies is providing some disruption opportunities (~$190mm market opportunity). Element has won 77 new clients from other FMCs in 2022 to- date. Converting self-managed fleets is a longer sales cycle and opportunity ($60mm current pipeline). Fleets transitioning to EVs could be a tailwind here as companies seek advice. Element's success with mega and government fleets positions it well, in our view, for further large mandates.
'Farmers' focus on retention and driving share of wallet (SOW). Increasing SOW is an ~$245mm opportunity from higher client penetration alone. Management believes it is differentiating on client experience (not price), and pointed to improving client retention (99% now vs. 95% in 2018) and net promoter scores (+41 now vs. -10 in 2017).
TD Investment Conclusion
The investor day illustrated to us management's depth and the company's confidence in maintaining its commercial and operational momentum. We believe the healthy order backlog will support the medium-term growth outlook, and positions Element well in a potentially slowing macro environment. In our view, maintaining earnings and FCF/share growth momentum will require translating the backlog into originations, further servicing growth, and syndication channels remaining open.