Company Overview: Eclipx Group Limited (ASX: ECX) is a financial service company in Australia, which works under three segments: Australia Commercial, Novated, and New Zealand Commercial. The company’s primary services include fleet leasing, fleet management, diversified financial services, novated leasing, vehicle sales, commercial equipment finance and consumer motor vehicle finance solutions. The company started to trade on ASX in April 2015.
ECX Details
Key Takeaway from FY21:
- Increasing Net Operating Income: With the strong order book, the company’s Net Operating Income (NOI) expressed a growth of ~32% Y-o-Y to $223.3 million in FY21. Net operating income pre EOL (end of lease) and provisions grew by 8%, mainly due to net margin expansion, higher maintenance profit and higher management fees. End of lease income rose by ~108% on pcp basis, owing to the strength in the used vehicle prices from higher demand and lower supply.
- EBIDTA Growth: With the 2% OPEX cost reduction and cost discipline, the company was able to grow its EBITDA by ~63% Y-o-Y mostly driven by net margin expansion, provision releases and temporarily elevated EOL income. Cash NPATA of the company grew by ~110% Y-o-Y to $86.1 million in FY21, mainly due to EBITDA contribution, cost discipline and reduced corporate debt costs.
Key Metrics (Source: Analysis by Kalkine Group)
*NPATA: It is the earnings of Group adjusted for the post tax effect of material one-off items that do not reflect the ongoing operations of the Group and amortisation of intangible assets
Share Buyback Completion On 9th March 2022, the company announced that it marked the completion of on-market share buyback program of $56 million (65% of FY21 NPATA), which started in May 2021. The next capital payout ratio for the next half-year period, i.e., 1HFY22 is expected to be announced in early May 2022, with the Group’s interim FY22 results.
Substantial Shareholding Update: In the February month, Australian Retirement Trust Pty Ltd ATF Australian Retirement Trust became ECX’s substantial shareholder by gaining ~6.43% of voting power. On the other hand, Sunsuper Pty Ltd as trustee for Sunsuper Superannuation Fund ceased to be the substantial shareholder in the company on 28 February 2022.
Top 10 Shareholders: The top 10 shareholders together form around 58.82% of the total shareholding, while the top 4 constitute the maximum holding. Yarra Funds Management Limited and Australian Retirement Trust Pty Ltd. are holding a maximum stake in the company at ~12.37% and ~6.43%, respectively, as also highlighted in the chart below:
Top 10 Shareholders (Source: Analysis by Kalkine Group)
Key Metrics: The company reduced its cash balance from 2019 to 2021 from $97.1 million to $76.4 million, respectively. Moreover, its total debt was reduced during that period from $1,608 million to $1240 million.
Liquidity Profile & Debt Profile (Source: Analysis by Kalkine Group)
Key Risks: The company is exposed to the following risk factors:
- COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company might get affected by the lockdown regulations and restrictions, which might affect its sales and operations.
- Demand & Supply Gap: The new vehicle availability has been witnessed as a major challenge globally, along with global logistics and pricing, which thereby affects stock availability and its management.
- Currency Price Risks: Considering the market volatility, its price is dependent on the external demand and supply of the raw material and it’s sourcing etc.
Outlook: Looking forward, with the expectation of normalisation of new vehicles supply, the company anticipates the price of the long term used car market to revert to 1H20/2H19 levels and unit sales are expected to increase as a return of supply emerges in 4Q CY2022. Though AUMOF (Assets Under Management or Financed) is still expected to face down pressure mainly due to supply constraints. However, it will be mitigated by NOI margin expansion backed by expected warehouse renewal and lower cost of funds. On the expense side, ECX expects to maintain its operating expenses to be flat at around $80 million in FY22. Its gross debt is likely to remain stable through FY22, however, lower interest expense will be incurred due to corporate debt refinance, which was reduced to $20 million as of 31st September 2021.
Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)
Source: Analysis by Kalkine Group
*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation: As per ASX, the stock of ECX is trading lower its 52-weeks’ average levels of $1.775 - $2.720. The stock gave a positive return of ~5.39% in the past three months and a negative return of ~3.58% in the past one month, proffering a decent opportunity for accumulation. The stock has been valued using P/BV multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average multiple, because of the increase in operational expenses, supply chain constraints and new vehicle availability. For the purpose of valuation, few peers like Prospa Group Ltd (ASX: PGL), Latitude Group Holdings Ltd (ASX: LFS), Money3 Corp Ltd (ASX: MNY), and others have been considered, which comes under consumer finance space. Considering the rise in revenue, growth in NPATA and EBITDA, upside potential in valuation, current trading levels, expected stability in operating expenses and interest expense in leases, optimistic long-term outlook, and key risks associated with the business and current market volatility due to global tensions, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.14, 01:20 PM (GMT+10), Sydney, Eastern Australia, as of 15th March 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
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ECX Daily Technical Chart, Data Source: REFINITIV
Note 1: The reference data in this report has been partly sourced from REFINITIV
Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.
Technical Indicators Defined: -
Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.
Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.
Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.
The Green colour line reflects the 21-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 21-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).
The Blue colour line reflects the 50-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 50-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).
The Yellow colour line reflects the Trendline, which shows whether the direction of the scrip is upwards or downwards.
The Purple colour line in the chart’s lower segment reflects the Relative Strength Index (14-Period) which indicates price momentum and signals momentum in trend. A reading of 70 or above suggests overbought status while a reading of 30 or below suggests an oversold status.
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