National Bank Financial analyst Jaeme Gloyn thinks Element Fleet Management Corp.’s “high quality” second-quarter earnings beat “supports upward momentum” and reiterated his stance it is a “core holding” that “every portfolio manager needs to own in all environments.”
“After the bell on Tuesday, the Toronto-based company reported revenue of $323-million, exceeding both Mr. Gloyn’s $313-million estimate and the consensus projection of $311-million. Adjusted earnings per share rose 14 per cent to 33 cents, also topped the 31-cent expectation of the analyst and Street.
“Element delivered a solid quarter,” he said. “The key, in our view, is the ‘high quality’ nature of the beat (i.e., from higher quality recurring service income and net financing revenue, while ‘lower quality’ syndication was a drag on revenues vs. our forecast). In addition, originations significantly outperformed as the June 2023 senior debt issue hinted, and expense growth (and thus margins) remained contained. Despite the 9-per-cent jump in shares since early July, we expect these Q2-23 results will keep Element on a strong upward trajectory toward (and beyond) our upwardly revised target price.”
Maintaining an “outperform” recommendation, Mr. Gloyn raised his Street-high target for Element Fleet shares by $1 to $31. The average is $25.14.
“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,” he said. “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 8 per cent on 2024 estimates, roughly 25 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.”