Post by
retiredcf on Oct 31, 2024 11:41am
CIBC Raises Target
EQUITY RESEARCH
October 30, 2024 Earnings Update
ELEMENT FLEET MANAGEMENT CORP.
Q3 Preview: Expect Double-digit Growth To Continue
Our Conclusion
EFN has been one of the top-performing stocks in our coverage universe in
2024 (+35% YTD). We maintain our Outperformer rating, premised on a
continuation of strong EPS growth in 2025E (12%) and 2026E (12%). We
recommend continuing to own for double-digit medium-term growth potential
in combination with the quality characteristics of the business. Our price
target increases from $30 to $33 as we now value EFN using a 17x P/E
(2026E) vs. 16x previously. EFN reports after market close on Nov. 13.
Key Points
EPS estimate revisions: We are revising our Q3 EPS estimate from $0.28
to $0.27, mostly due to the devaluation of the Mexican peso. Our revised
estimate compares to consensus of $0.28. Our revised full-year 2024 EPS
estimate of $1.11 remains within management guidance of $1.07-$1.11. We
forecast FCF per share of $0.32 for Q3, $1.37 for 2024, and $1.50 for 2025.
Capital actions: EFN increases its dividend once a year with Q3 results. We
forecast a 20% dividend increase based on its 25%-35% payout ratio target
(using free cash flow). Balance sheet optimization is complete as of Q3 with
the final series of preferred shares redeemed at the end of September. Use
of FCF can be re-allocated back to common share repurchases. We model a
3% reduction in shares outstanding in 2025.
Expect double-digit revenue growth to continue: We are forecasting Q3
revenue growth of 10% Y/Y compared to growth of 14% last quarter. We
expect revenue growth to be driven by servicing income (12% Y/Y) and an
increase in net earning assets (15% Y/Y). We assume lower gains on sale
and lower syndication revenue, bringing growth down from mid-teens to low
double digits. Our Q3 revenue forecast appears appropriate in the context of
management’s 2024 revenue guidance as our full-year forecast is modestly
above the guidance range.
Expense growth to remain high: Double-digit expense growth is expected
due to strategic initiatives (e.g., opening of Dublin and Singapore offices) and
required investments to support business growth. We forecast Q3 expense
growth of 11% Y/Y, translating to an operating margin of 56.5% (down 40
bps Y/Y). We expect the operating margin will be roughly in the same range
in 2025 as 2024, but look for margin expansion after that as the company
starts to benefit from its investments in automation and digitization, including
the Q2 acquisition of AutoFleet.
Valuation: EFN is trading at a 16.9x P/E (2025E consensus), well above its
five-year average of 14.2x. There is an increasing proportion of shareholders
that are valuing the stock off FCF yield. On that basis, EFN is trading at 7.0%
(2025 CIBCe) and the bull argument on valuation points to ~5%-6% as an
appropriate yield. Potential upside on that basis is $5-$11 per share.
Reporting details: EFN reports after market close on November 13.
Conference call is Thursday November 14 at 8 a.m. ET (1-844-763-8274).