Multiple Raised Targets National Bank Financial analyst Jaeme Gloyn thinks it’s now “time to buy” Element Fleet Management Corp. after better-than-expected first-quarter results and a raise to its full-year guidance.
“In his final letter to shareholders, outgoing CEO Jay Forbes spoke of creating ‘a fine timepiece” at Element. Checking the EFN Q1 clock tells us it’s time to buy the stock,” he said. :We expect solid beat and guidance upgrade combined with positive commentary on syndication markets will drive meaningful upward revisions to estimates and price targets (NBF goes to $30 from $28). We believe the shares will follow in kind, up double digits. The one nitpick that could hold the shares back is that FX drove the bulk of the guidance upgrade, a less predictable earnings and FCF driver.”
After the bell on Tuesday, the Toronto-based pure-play automotive fleet manager reported revenue of $304-million for the quarter, up 9 per cent year-over-year on a constant currency basis and exceeding both Mr. Gloyn’s $289-million estimate and the consensus forecast of $283-million. Earnings per share of 31 cents was 15 per cent higher than the 27-cent expectation of both the analyst and the Street.
Mr. Gloyn called the result a “solid” beat, pointing to a 19-per-cent year-over-year gain in free cash flow per share to 37 cents (versus his 34-cent forecast) and revenue growth across all its business lines.
“Crucially, organic growth strategies to increase vehicles under management, penetration and utilization is driving the majority of service revenue growth year-over-year and quarter-over-quarter,” he said.
Element also increased his 2023 guidance, raising its net revenue projection by 8 per cent, EPS by 12 per cent and FCF per share by 9 per cent.
“The upgrade reflects management’s confidence in i) sustained success on organic growth initiatives, ii) waning impact of the pandemic, iii) gradual increase in OEM deliveries, and iv) tailwinds from inflation,” the analyst said.
After increasing his EPS and FCF estimates through 2024, Mr. Gloyn raised his target for Element Fleet shares by $2 to $30, reiterating an “outperform” rating. The average target is $24.
“EFN is a ‘core holding’ we believe every PM needs to own in all environments,” he concluded. “EFN is a low-risk, double-digit FCF and dividend grower, with blue-sky share price potential easily into the $30s over the next two years regardless of the market backdrop. We view growth as de-risked given 1) continued solid execution on an organic growth pipeline of $500 million of revenues (approximately 40 per cent above 2022 levels) to be earned in the next few years, 2) a massive order backlog with high-margin revenues to support that growth in H2 2023 through 2024, and 3) mega-fleet wins not baked into guidance or consensus estimates (see Rentokil in December 2022 and Armada, OXXO and TELUS added in early 2023). In addition, EFN still trades at an FCF Yield of 9 per cent on 2024 estimates, roughly 40 per cent above the yield of Canadian Financials 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 in 2023, we expect significant yield compression.”
Elsewhere, others making changes include:
* Scotia’s Phil Hardie to $22 from $20 with a “sector perform” rating.
“We expect to see a positive investors’ reaction coming out of the first quarter results,” said Mr. Hardie. “Element started the year out on a strong note, with Adj. EPS coming in ahead of expectations and management raising its guidance for the year. A favourable shift in the exchange rate provided a solid tailwind for earnings growth in the quarter and was a key driver to the revised guidance. That said, this should not overshadow the solid operating momentum demonstrated by the company.”
“EFN stock has lagged over the last six months, however, we believe the risk/reward of owning the stock has improved and we are becoming increasingly constructive on the name.”
* Raymond James’ Stephen Boland to $26 from $24 with a “strong buy” rating.
“Overall, this was another solid quarter. ... Positively, EFN increased its 2023 revenue, adjusted EPS and FCF p/sh guidance from 4Q22. OEM issues continue to impact originations, and management expects the backlog to remain at elevated levels for the balance of 2023. Services again had another strong quarter as higher utilization rates (bolstered by aging fleets) and fuel/parts inflation continues to support growth year-over-year. Syndication volumes remain robust as demand for high quality credit products continues though there is some margin compression. Guidance for origination and syndication volumes were unchanged.
“EFN remains our top pick heading into mid-2023. The higher guidance is positive. Aging fleets are also helping to bolster Service revenue to new highs. The new CEO was present on the call and was participating in the Q&A.”
* RBC’s Geoffrey Kwan to $28 from $27 with an “outperform” rating.
“Very good Q1/23 results + significant 2023 guidance increase demonstrated why we thought EFN’s recent share price weakness was unwarranted (since the end of February 2023, EFN’s share price is down 8 per cent vs. up 2 per cent for S&P/ TSX Composite and up 4 per cent for S&P500),” said Mr. Kwan. “Q1/23 results marked the final quarter of a highly successful tenure for retiring CEO Jay Forbes and we think President and incoming CEO Laura Dottori-Attanasio can help sustain the positive momentum. EFN is delivering excellent fundamentals winning new customers, cross-selling existing clients additional fleet services with 2023 results that should be further bolstered by finally having improved OEM production. EFN is our #1 high-conviction best idea as it has a rare combination of significant growth potential; discount valuation; and substantial FCF generation. At the same time, EFN offers strong defensive attributes and stands to benefit in a recession, high interest rate and/or high inflation environment.”
* Barclays’ John Aiken to $24 from $23 with an “overweight” rating.
“As Jay Forbes bids us adieu in very successful five years at the reins of the transformation, Element caps off his final quarter as CEO with strong earnings and yet another lift to guidance,” said Mr. Aiken.
* BMO’s Tom Mackinnon to $24 from $23 with an “outperform” rating.