Q4/22 results below forecast and consensus; 2023
guidance reduced again
Our view: Q4/22 results were disappointing with EPS and originations below our forecast. Furthermore, 2023 organic EPS guidance was reduced for the second consecutive quarter, this time by -27% (at the midpoint). While weaker Q4/22 originations may have been partly due to timing shifts, we think higher interest rates and a more uncertain economic environment are likely negatively impacting originations. We reduce our price target to $3.50 (from $4.00) and maintain our Sector Perform rating. While ECN recently announced that its is exploring strategic alternatives (not just a sale of the company, but other potential options are being considered), our valuation assumes the status quo.
Key points:
Q4/22 adjusted operating EPS (basic) of US$0.02 was below our forecast of US$0.05 and consensus of US$0.03 (range: US$0.03–0.05). The shortfall to our EPS forecast was driven by lower-than-forecast origination revenue and higher-than-forecast interest expense.
On a segmented basis: Triad Financial pre-tax operating income of US $15.6MM was below our US$20.3MM forecast, driven by higher-than- forecast interest expense and lower-than-forecast origination revenue; Source One/IFG pre-tax operating income of US$1.3MM was below our US $5.7MM forecast, driven by lower-than-forecast origination revenue.
ECN reduced its 2023 organic EPS guidance by -27% (using the midpoint) to US$0.18–0.22 (from US$0.25–0.30), which follows the prior 2023 organic EPS guidance reduction when ECN reported Q3/22 results in November 2022. ECN is implementing expense-reduction initiatives in H1/23, which it expects to reduce costs by US$10–13MM/year.
On its M&A strategy, ECN did not provide updates on its discussions with potential acquisition targets and said that it will be patient and focus on accretive acquisitions at attractive valuations. In January 2023, ECN acquired Wake Lending, LLC, a marine finance company, for US$2.5MM in cash.
Other key takeaways: (1) Triad’s origination volumes saw improvement in Q1/23 with January +8% Y/Y and February +15% Y/Y and originations being fully funded for 2023; (2) ECN launched a RV and Marine inventory finance business in 2022 and has originated US$125MM of assets in 2022; and (3) ECN has agreed with an existing institutional partner to flow and manage up to US$300MM of inventory finance loans starting in Q2/23.
Reducing 12-month price target to $3.50/share (from $4.00) but maintaining Sector Perform rating. Our reduced price target reflects lower financial forecasts.