CIBCEQUITY RESEARCH
May 15, 2023 Earnings Update
ECN CAPITAL CORP.
All Eyes On Outcome Of Review Of Strategic Alternatives
Our Conclusion
ECN reported Q1 adjusted EPS that was a penny below consensus owing to
a lower gain on sale margin in the manufactured housing segment.
Management indicated that margins were impacted by a few transient factors
that should normalize by Q3. In RV and Marine, a slower environment in
marine seems to be persisting, but Triad is the much larger contributor to
enterprise-wide operating income. Overall, we believe that the outcome of
the ongoing review of strategic alternatives is far more important to the
outlook of the stock than our read on Q1 operating and financial results. To
that end, the company is anticipating completion of the process by August.
Key Points
Adjusted earnings come in slightly below expectations. Adjusted EPS
came in at $0.01 versus our estimate and the consensus average of $0.02.
At Triad, lower pooled gain on sale margins reduced origination revenue by
$6.3 million. This was attributed to the rapid increase in interest rates in 2022
and the extended industry backlog resulting in an extended period between
loan approvals and funding. ECN expects gain on sale margins to normalize
by Q3. If we add back the associated impact on revenue, adjusted EPS
would have been in line with our estimate. However, the company also
recognized an $11 million pre-tax expense associated with an “asset
disposal, litigation & restructuring charge” which was excluded from adjusted
earnings. Management indicated that this was related to the previously
announced expense reduction plan.
Triad earnings contribution moderates owing to gain on sale margin.
Triad generated originations of $286 million in Q1, generally in line with our
prior forecast of $293 million. Approvals, however, declined 14% in Q1,
which some interpret as a leading indicator for originations. Adjusted
operating income before tax of $11.2 million was below our estimate of $14.0
million owing to the aforementioned gain on sale margin.
Marine slowdown persists. Total originations came in at $179 million,
which was 10% below our estimate and down 27% from the year-ago period
(assuming IFG has been owned in Q1/2022). ECN indicated that RV
continued to outperform, but the Marine slowdown has persisted.
Review of strategic alternatives is ongoing. ECN indicated that the
previously announced review of strategic alternatives continues to progress
and the company anticipates reaching a conclusion and announcing results
by August when Q2 results are released. Owing to the ongoing review, ECN
is not hosting its usual conference call to discuss results. We believe that the
outcome of the review will be far more important than our read on Q1 results.
Guidance to be updated in Q2. ECN indicated that it plans to update its
2023 outlook following conclusion of the strategic review.