Earnings Compounder Trading At A Reasonable Valuation Our Conclusion
EFN reported an all-around strong quarter. We expect 2024 consensus EPS
to gravitate to the upper end of the guidance range. We have increased our
EPS estimates for both 2024 and 2025 and increase our price target from
$25 to $26. Maintain our Outperformer rating.
Key Points:
EPS estimates revised higher. Our 2024 EPS estimate is increased by 2%
due to higher servicing income assumptions, higher net financing revenue,
partly offset by higher expense assumptions. Our revised EPS estimate of
$1.09 on basic shares o/s ($1.07 fully diluted) is at the upper end of
management guidance ($1.05-$1.09). Our 2025 EPS estimate increases 1%
mainly due to higher servicing income and implies Y/Y growth of 9%.
Servicing income growing faster than anticipated. Y/Y growth of 21%
(ex. non-recurring items) was much better than our forecast for 11%. Higher
service penetration rates, customer growth, origination growth and continued
strong growth in Mexico are all supportive of higher growth for servicing
income. We have revised our 2024 growth forecast from 12% to 17%.
Origination growth on track. Originations increased 10% Y/Y and were
slightly higher than our forecast (+6%). Management expects higher volumes
in Q2 and Q4 and says it is on track to hit its guidance of $7.0-$7.4B, which
would make it a record year. We forecast $7.1B.
Spread income more resilient than expected. Management had guided to
a lower net financing margin in 2024 on a number of factors. The margin was
down 86bps Y/Y, but that was 15bps better than we had forecast. There will
be a little more of a drag on margins in future quarters as preferred shares
are refinanced with debt. However, this is still expected to be EPS accretive.
We are modeling net financing revenue growth of 4% for 2024 versus the 9%
growth posted in Q1.
Syndication volumes deferred. Management stated that it intends to
syndicate more volume in the remainder of 2024. The syndication fee rate
remains relatively low (1.79% vs 2.0-2.5% in 2021-2022). Accordingly, we
would rather see EFN keep more assets on balance sheet.
Operating margins in line with target. Expense growth (16% Y/Y) was
higher than we had expected but that does not change the margin outlook.
The company is managing expenses relative to revenue and with a higher
revenue growth quarter there was an acceleration in project spend. Flattish
margins should be expected in 2024 and 2025.
Optimizing the capital structure in 2024 will free up free cash flow. EFN
reiterated its intention to redeem all remaining preferred shares this year
along with the conversion of convertible debt. We assume 4% of shares o/s
are repurchased in 2025.