Element Fleet Management Corp.
No RickRolling here: Strong Q3/23, 20% dividend increase and 2024 guidance seems conservative
Our view: Q3/23 results re-affirmed why EFN is our high-conviction #1 best idea as EPS was solidly ahead of forecast and consensus with originations well ahead of forecast and consensus, providing further evidence OEM production appears back to normal levels, which we think is important to provide another driver of EPS growth. 2024 EPS guidance appears conservative as Q3/23 run-rate EPS is already at the lower end of guidance and the F/X assumption is below the current rate. We think EFN has the best risk-reward profile in our coverage universe, with significant growth potential; strong defensive attributes; multiple potential catalysts; and valuation that is mispriced (13.5x P/E and 9.1% FCF yield on 2024E).
Key points:
See our Nov. 5, 2023 report on EFN “Why EFN is our #1 high-conviction best idea”, for additional details.
2024 Basic Operating EPS Guidance of $1.41-$1.46 appears conservative to us given Q3/23 normalized EPS of $0.36 annualized is $1.42, so already within guidance and we think EFN's positive fundamentals suggest EPS should generally increase Q/Q. Also, 2024 guidance assumes CADUSD of $1.35 vs. current spot at $1.37 (a $0.01 F/X move impacts EPS by ~ $0.05), giving a potential tailwind. Our 2024 EPS forecast remains $1.52 vs. consensus prior to Q3/23 results $1.47 (range of $1.40 to $1.54).
Q3/23 operating EPS of $0.36 was solidly ahead of our $0.33 forecast and $0.32 consensus (range: $0.31 to $0.34). The positive variance to our forecast was primarily higher-than-forecast service revenues.
Q3/23 originations of $2.72B were well ahead of our $1.98B forecast and ahead of consensus at $2.02B (range: $1.76B - $2.15B).
+20% quarterly dividend increase to $0.48/share annualized (was $0.40) was right in line with our forecast.
Strategic initiatives announced: (1) consolidating the U.S. & Canadian leasing operations at a new office in Dublin; (2) opening a Singapore office to strengthen existing and build new sourcing/procurement (e.g., OEM) relationships in Asia; and (3) greater investment in digitalization and automation. From a financial standpoint: (1) EFN expects ~$25MM-$30MM in 1-time expenses which should be completed by Q2/24; (2) contribute profitable net revenue growth and operational efficiencies starting in 2025 and fully recoup the total set-up costs within ~2.5 years; and (3) generate between $40MM-$60MM of run-rate net revenue and ~$30MM-$50MM of run-rate adjusted operating income by full-year 2028.
Maintaining our Outperform rating, $30 target. Conference call Tuesday at 8am EST; dial in: 1-800-319-4610 (link to webcast on EFN’s website).