ELEMENT FLEET MANAGEMENT CORP.
Growth
Our Conclusion
Shares of EFN have advanced ~19% since reporting Q1/23 results, which
included positive revisions to revenue and earnings guidance. OEM
production and sales data for Q2 shows a significant improvement vs. year-
ago levels. We have increased our origination forecasts and earnings
estimates as a result. We would not be surprised if management raised full-
year guidance again. While the valuation multiple is unlikely to push much
higher in our view (17x 2023E), we do think there is potential upside to EPS
estimates. We increase our price target from $22 to $24, based on 17x
2024E. We continue to like the name for low balance sheet risk, positive
industry fundamentals and earnings growth.
Key Points
Increasing EPS estimates: We are increasing our Q2, 2023 and 2024 EPS
estimates in response to strong OEM production and supply of vehicles to
fleet managers. Our revised Q2 EPS estimate of $0.32 is now above
consensus of $0.31 and our full year estimate of $1.25 ($1.29 on basic
shares o/s) is close to the top end of management’s guidance range.
Industry data points to a strong quarter for originations: Production
volumes from Element’s key OEMs suggest a 15% Y/Y increase. Industry
data also shows that a higher proportion of production is being allocated to
fleet sales. Our Q2 origination forecast of $2.2B implies Y/Y growth of 15%,
and would put the company on track to meet or exceed its full-year guidance.
Syndication revenue should benefit from higher originations: We are
forecasting $900MM in syndication volume, representing a little over 40% of
originations. Liquidity conditions remain tight and we assume a syndication
yield of 2.1%, similar to last quarter. This drives our syndication revenue
forecast of $19MM, up from $15MM a year ago. We expect the company will
reach its $3B-$4B syndication volume guidance for 2023.
Momentum in servicing income should continue: We forecast servicing
revenue to come in at $162MM, up 8% Y/Y. Overall servicing revenue should
be strong based on customer growth, share of wallet gains and economic
activity. We expect 10% annual growth in 2023.
Expense growth expected to remain elevated: Customer growth,
investments in the business and inflation are expected to result in higher-
than-normal expense growth. We forecast expense growth of 12% Y/Y. Due
to strong revenue trends, we expect operating margins to be relatively flat
Y/Y (consistent with full-year guidance).
Element is scheduled to report earnings after market close on August 8. The
conference call is scheduled for August 9 at 7:30 a.m. ET (1-800-319-4610).