RBC Dominion Securities analyst Geoffrey Kwan named Element Fleet Management Corp. his “high-conviction best idea” heading into earnings season for Canadian diversified financial companies, believing it is mispriced and a recent share price decline is “unwarranted.”
“EFN trades at just 12.9 times 2024 estimated P/E [price to earnings] and 10-per-cent 2024 estimated FCF [free cash flow] yield, which we think is undervalued given LTM [last 12-month] EPS and FCF/share growth of 26 per cent and 28 per cent, respectively, and we think EFN can deliver a more than 16-per-cent EPS CAGR [compound annual growth rate] over the next 5-years, helped by factors like significant growth opportunities (OEM production normalizing; self-managed fleets; continued market share wins; crossselling more fleet services to existing clients; mega fleets) and substantially lower credit and other risks vs. other Financials,” he said. “We think the UAW strike impact as likely immaterial as EFN’s customers still need substantial vehicle replacements given the OEM production shortage over the past 2+ years. EFN has very strong fundamentals (new customer wins, cross-selling existing clients additional fleet services); strong defensive attributes (recession unlikely to be a headwind; positively benefits from high inflation; low interest rate risk); potential catalysts (e.g., substantial return of capital likely exiting 2024); and very attractive valuation.”
In a research report released Tuesday, Mr. Kwan maintained his “outperform” rating and $30 target for shares of Element Fleet, exceeding the $25.69 average on the Street.
However, he made several target changes to stocks in his coverage universe, including his second- and third-ranked stocks. They are:
No. 2: Brookfield Asset Management Ltd. ( “outperform”) to US$41 from US$45. Average: US$37.24.
Mr. Kwan: “Trading at 19 times 2024 estimated Fee Related Earnings (FRE), while we believe FRE multiple expansion is likely (1 times FRE = approximately US$1.50, or 5 per cent to BAM’s share price), we think significant valuation upside is likely to be driven by FRE growth as BAM is fundraising for numerous Flagship (Global Transition, Real Estate, Opportunistic Credit, Direct Lending) and non-Flagship funds.”
No. 3: Brookfield Corp. (“outperform”) to US$43 from US$48. Average: US$47.36.
Mr. Kwan: “BN’s shares trade at a substantial 31-per-cent discount to NAV. While investor concern regarding Real Estate is understandable, BN’s share price implies zero value for its Real Estate investments and we think overall performance in BN’s other sectors remains positive.”