More Raised Targets National Bank Financial analyst Jaeme Gloyn expects the Street to react favourably to the quarterly release from Element Fleet Management Corp. , calling it a core holding that he thinks every portfolio manager should own “in all environments.”
“The EPS beat, guidance upgrade, and even a tuck-in acquisition that should accelerate the digitization strategy highlight what is a solid quarter that reflects a strong management team continuing to execute,” he said. “We reaffirm our view that EFN is a ‘core holding’. We see continued upside for the shares in 2024 with catalysts from i) Mexico investor day in September, and ii) details of a three-year plan in late 2024 or early 2025.”
After the bell on Tuesday, the Toronto-based automotive fleet manager reported second-quarter revenue of US$275-million, exceeding both Mr. Gloyn’s US$267-million estimate and the consensus forecast on the Street of US$260-million. While operating expenses came in higher than anticipated, adjusted earnings per share grew 17 per cent year-over-year to 29 US cents, topping expectations (28 cents and 27 cents, respectively).
Concurrently, Element Fleet announced the acquisition of Israeli company Autofleet Solutions Ltd. in a deal valued at $110-million and aimed at accelerating its digitization and automation capabilities. It expects the transaction to close in the fourth quarter.
Summarizing the results, Mr. Gloyn said: “Key takeaways from the Q2 results: 1) net revenue increased 14 per cent year-over-year, well above the 4-6-per-cent growth objective. Crucially, servicing income (up 11 per cent year-over-year on higher penetration) and net financing revenue (up 16 per cent year-over-year on higher earning assets and yields while gain on sale was flat) drove revenue growth. 2) Organic growth initiatives continue to drive results as i) share of wallet, market share gains, increased utilization, and ANZ/MEX drove over three-quarters of the year-over-year growth), ii) vehicles under management increased 14 per cent year-over-year (excluding white-label vehicles lost); 3) operating margin of 55.7 per cent beat the street 55.0 per cent (NBF 55.5 per cent); 4) FCF per share of $0.38 increased 12 per cent year-over-year and significantly beat the street/NBF at $0.33. 5) Syndication volumes doubled year-over-year reflecting strong demand and an expanding roster of investors. To nitpick, syndication yield dipped to its lowest level on record. We’re not too concerned as syndication drives balance optimization first (allows for efficient capital deployment to buybacks), and revenues second (less than 5 per cent of total revenues).”
Mr. Gloyn also said a modest in increase to the company’s full-year guidance reflects strong year-to-date results and “management’s confidence in the near-term outlook.”
“While not a huge upgrade, we believe management continues guide conservatively. Therefore, our EPS and FCF/share estimates remain above the high-end of the revised guidance,” he added.
Reiterating an “outperform” rating for Element Fleet shares, the analyst raised his target to $34 from $33. The average is $29.78.
“EFN is a low-risk, double-digit FCF and dividend grower, with blue-sky share price potential $40 over the next two years, regardless of the market backdrop,” he said. “We view growth as de-risked given 1) continued solid execution on organic growth strategies (e.g., win market share, penetrate self-managed fleet, increase share of wallet), 2) new revenue drivers such as insurance and SME/mid-market expansions, and 3) mega-fleet wins not baked into guidance or consensus estimates. Moreover, we expect management will gradually expand adjusted operating margins (30 to 50 bps annually) to drive profitable revenue growth.
“In addition, EFN still trades at an FCF Yield of 8 per cent on 2025 estimates, roughly 40 per cent above the yield of Canadian Financials and more than double the yield of Industrials with similar fundamentals (e.g., defensiveness, strong organic revenue growth, expanding profitability, solid FCF generation, low credit risk and barriers to entry). As EFN executes, we expect significant yield compression.”
* Raymond James’ Stephen Boland to $30 from $29 with a “strong buy” rating.
“We expect double-digit EPS growth over the next two years and ongoing improvement in the ROE. Overall this was another positive quarter with strong originations, customer retention and higher guidance,” said Mr. Boland.