Raymond James analyst Stephen Boland said a “highly constructive” Investor Day event reaffirmed his confidence in Element Fleet Management Corp.’s business, prompting him to raise his recommendation for its shares to “strong buy” from “outperform.”
“While the discussion was broad and diverse, the overall takeaway was clear: EFN has left its past issues in the rear-view mirror and finally looks poised to deliver on its long-term growth objectives,” he said. “Through a series of internal initiatives, strategic revamps and a more disciplined capital allocation strategy, EFN has transformed itself into one of the most robust and resilient businesses in our coverage. With a more asset-light approach — supported by higher services revenue and greater syndication volumes — the company is delivering increasingly higher returns on capital. The rationale behind the original 2016 Element Financial split is finally coming to fruition. Moreover, management is now confident that EFN can now deliver long-term double-digit growth in free cash flow per share.”
Mr. Bolland said “attractive” industry dynamics help support Element Fleet’s “low risk, resilient business model” and thinks its scale helps differentiate it from peers.
“EFN’s long-term client relationships result in material switching costs for customers. Management noted that recent data suggests client retention is close to 99 per cent,” he said. “In addition, EFN’s diverse customer base — along with the mission-critical nature of fleet assets — has driven exceptionally low credit losses over time. Given the current excess backlog and the potential for better origination volumes in 2023 and 2024, management believes the business can perform strongly even in a recessionary environment.”
“As the market leader in each of its geographies, EFN’s scale holds significant sway. Firstly, the depth of EFN’s relationships gives it significant pricing power with suppliers, generating incremental cost-savings for customers. Secondly, with 1.5 million vehicles under management, EFN has access to a vast array of data sources. EFN has been able to leverage this information to help optimize customer maintenance spend, extend the useful life of vehicles and maximize value upon resale.”
Touting its “significant organic growth runway,” he raised his target to $24 from $21. The average is $21.75.
Others making changes include:
* BMO’s Tom MacKinnon to $23 from $21 with an “outperform” rating.
“EFN’s Investor Day gives us increased confidence in EFN’s ability to deliver on its recently-increased 6-8-per-cent organic revenue growth target (recently upped from 4-6 per cent),” said Mr. MacKinnon. “We see EFN, with 8-per-cent 2023 estimated FCF per share yield, as a fundamental long, and its low-risk organic revenue growth model, with annuity-like predictability, accelerating FCF, for which the majority is returned to shareholders, as translating into consistent 10-per-cent-plus organic EPS & FCF per share growth.”
* TD Securities’ Graham Ryding to $22 from $21 with a “buy” rating.