Solid Quarter Supports Continued Growth In 2024 Our Conclusion
Q4 results affirm our confidence in management’s ability to meet and
possibly exceed 2024 guidance. EFN continues to be a name in our
financials coverage universe that is relatively less sensitive to
macroeconomic risks and is delivering strong earnings growth. The stock has
re-rated from Q3 earnings and is currently trading at 16x P/E (NTM
consensus). We increase our price target from $24 to $25 based on a higher
target multiple (16x P/E vs. 15x prior). We maintain our Outperformer rating.
Key Points
2024 guidance maintained; no change to our EPS estimates. Q4
adjusted EPS of $0.33 (fully diluted shares o/s) was slightly better than our
estimate of $0.32 and in line with consensus of $0.33. 2024 EPS guidance of
$1.41-$1.46 was maintained and there is no change to our estimate of $1.42.
Strong top-line growth. Q4 revenue came in at 14% Y/Y. It was another
strong quarter for servicing income (+18% Y/Y) and we expect positive
momentum to carry into 2024. Net financing revenue was up 11% Y/Y and
we expect slower growth in 2024 based on lower gains-on-sale and higher
interest expense. Syndication revenue of $18MM was up only 1% Y/Y due to
lower syndication yields, which was expected. Our 2024 revenue forecast
remains at the top end of the guidance range ($1,365MM-$1,390MM).
Origination guidance added for 2024. Management supplemented existing
2024 guidance with origination guidance of $9.5B-$10.0B (ex. Armada). This
compares to $8.55B in 2023, implying expected growth of 11%-17%. This is
better than our prior forecast of $8.3B. Continued origination growth is an
indication of strong client demand and new customer wins.
Expense growth should moderate in 2024. Q4 operating expenses
increased 6% Y/Y, a slower pace versus full-year 2023 expense growth of
15%. We are forecasting expense growth of 6% in 2024, resulting in an
operating margin of 55.6% versus management guidance of 55.0%-55.5%.
Strategic initiatives on target. Element is on target to open its new Dublin
office that will centralize leasing functions and a new vehicle procurement
office in Singapore mid-2024. Q4 included $14.6MM of one-time expenses
for strategic initiatives (not included in adjusted EPS). Additional strategic
initiative costs of $11.5MM are expected to be incurred evenly in Q1 and Q2.
Payback on strategic initiatives is expected starting in 2025, with full run-rate
of $30MM-$50MM expected by 2028.
A year of balance sheet optimization. EFN redeemed $115MM of
preferred shares in December and plans to redeem another $261MM in
2024, taking preferred shares outstanding to zero. Remaining convertible
debt of $169MM is expected to convert to common shares (conversion price
of $11.77/share). We estimate the net EPS impact is negative $0.01/share
due to the dilutive impact of the converts (adds ~4% to shares o/s).