Company Overview: Eclipx Group Limited is a financial services company, which provides complete fleet management services, corporate and consumer asset backed finance and medium term vehicle rentals to the Australian and New Zealand market. The Company's segments include Australia Commercial, Australia Consumer and New Zealand Commercial. The Australia Commercial segment is engaged in vehicle fleet leasing and management business; commercial equipment finance and leasing, and has a diversified funding structure, which includes multiple funding parties. The Australia Consumer segment is engaged in online broker facilitating consumer financing for vehicles in Australia; consumer novated leasing business in Australia, and medium term rental to not at fault drivers. The New Zealand Commercial is engaged in vehicle fleet leasing and management business in New Zealand; used vehicle retail sales, and medium term rental to not at fault drivers. It brands include FleetPlus, Right2Drive and AutoSelect.


ECX Details

Eclipx Group is more than a fleet management company and is an integrated asset manager. It generates value through the asset lifecycle that is by expansion into disruptive high growth capital light adjacencies. The Group has 20+ years of experience in building customer centric financial services technology. It actively encourages and supports the environmental, social and sustainability programs at national and at community levels. Revenue synergies are realised through cross-sell of finance of Auto and Industrial Auction customers that generate positive earnings and returns to the Group as a whole. Its continuous diversification has led to a strong NPATA growth that is, double digit growth across all its segments. It has the most diversified and defensive funding profile in the market which leverages warehouses, ABS (asset-backed securities) and third-party funders.

Key Achievements and Growth Drivers: Its core Australian fleet business outperformed the market and continued to add new customers. The group was also focusing on growing its share with existing customers which will underpin receivables and revenue growth in years to come. Its proprietary “Big Data” vehicle platform and expanded distributed channels provided the Company with unique insights of the motor vehicle market. This enabled the Company to set appropriate residuals on vehicles so as to place them at end of the lease in locations where sale prices can be maximised. In FY17, Right2Drive increased its footprint to 30 branches and number of vehicles hired amounted to more than 33,000. It recently launched a Commercial Equipment Finance business in New Zealand, which was designed to leverage its existing expertise.
 

Performance of New Business Writings and Impact of New Account Wins (Source: Company Reports)
 
Acquisition of GraysOnline: In August 2017, Eclipx completed the acquisition of Grays eCommerce Group Limited, Australian leading online marketplace for auctioning of vehicles, plant and equipment. Since acquisition, the Company largely completed the cost rationalisation program which was initiated by the Group post-acquisition. It successfully integrated the Grays corporate functions within its head office and exited the loss-making retail categories. As it continued to upgrade the Grays infrastructure and improve the user experience, it is expected that Grays will not only be a strong contributor to Eclipx earnings in its own right but will also add important distribution channel and cross sell opportunities to all of its brands. Grays performance remains on track and it is expected that it will deliver EBITDA of $23-$25 million (NPATA $14.0-15.4 million) in FY18 which represents a highly accretive EPS contribution of 29.7-32.7 cents per share. Moreover, acquisition of Grays resulted in increasing of the selling prices of heavy vehicles.

Segment Performance post-acquisition of Grays: The Australian Commercial segment continued to grow its share of the Australian fleet market as well as the assets under management and earnings. At the end of 2017, it consisted of over 54,000 of vehicles under management and earnings amounted to about $40.0 million which was up by 10 per cent as compared to 2016. If we talk about New Zealand business, the uncertainty related with the New Zealand election and results created some indecision in late FY17 and the group was not able to experience the earnings growth as expected. Right2 Drive delivered its full year results and achieved the upper end of the guidance which it released to the market at the time of acquisition since 2016. Its Consumer segment continued to perform well, and new business writings were up by 16 per cent in 2017 and made great strides by improving both, lead buying and lead conversion efficiency. Its New Zealand Commercial Equipment Finance business was an exciting adjacency to its market leading fleet business which enabled the Company to cross sell other finance solutions into its under-served New Zealand SME segment.
 

Performance across diversified portfolio (Source: Company Reports)
 
On track to deliver on guidance: ECX recorded a 23 per cent growth in NPATA for FY17 amounting to $68.3 million which exceeded market guidance due to strong performance in Fleet businesses and Right2Drive. It included a solid $1 million of NPATA contribution from GraysOnline in stub period. An increase of 35 per cent in net operating income was recorded at the end of FY17 before the end of the lease and impairment which reflected a continued growth in fleet businesses together with a growth in vehicle drives in Right2Drive. There was an increase of 13 per cent in the lease income as compared to FY16 which was due to the increase in disposal of channel optimisation. Cost to income ratio of its fleet business improved by 290bps and amounted to 51.4 per cent in 2-year period till FY17 and overall cost/Income increased to 58.8 per cent as compared to 56.4 per cent in FY16 and this was due to the acquisition of R2D and GraysOnline. Cash EPS (cents) was 25.1 in FY17 against 22.2 in FY16 and the group paid a fully franked final dividend of 7.75 cps on 19 January 2018.  At the end of FY17, the Group reported for $275 million of cash and committed undrawn credit facilities. Total assets under management for FY17 increased by 10 per cent and amounted to $2.24 billion.
 

Growth Snapshot across various parameters (Source: Company Reports)
 
Other Developments: The Group entered into a Strategic Partnership with the Medical Indemnity Protection Society (MIPD) for the provision of innovative financing solutions for its 51,000 members and it included Medical Practitioners and Nuclear Scientists. Eclipx provided financial literacy and ongoing financing information to MIPS members as part of this partnership. Eclipx Group mandated ANZ, NAB and Westpac to engage with investors in relation to Eclipx ABS Programme and Eclipx Turbo Trust. CBA ceased to be a substantial holder of Eclipx since 08 December 2017. Bennelong Australian Equity Partners Ltd became the substantial holder since 7 March 18 by holding 20,400,841 of securities, i.e., 6.4544 per cent of the voting power. Linda Jenkinson was appointed as a non-executive director of the Group. Further ECX successfully priced its fourth Australian Asset Securitisation and issued a total of A$351.5 million of bonds which was supported by motor vehicle operating by finance and by novated lease receivables.

Positive Outlook for 2018: As previously indicated in FY17 results which were released in November, it is expected that ECX will generate strong earnings momentum into FY18 and will target a growth of NPATA of 27-30 per cent over FY17 which represents a Cash EPS growth of 10-12 per cent. It is expected that earnings split will be skewed towards 2H which is due to seasonal influences of the Grays auction activity and due to Right2Drive businesses. The Group has successfully repositioned its funding to mitigate the changes from APRA APS 120 in 2018 by refinancing all non-AAA notes from the major trading banks to non-bank financiers. It continues to hedge its interest risk rate across all of its new business writings. Earning Diversification with growth adjacencies will continue which contributes an increase in share of earnings in FY18. Despite of a competitive environment, the group will continue to focus on growing its share in the market of Fleet Business.
 

NPATA for 2018 (Source: Company Reports)
 
Stock Performance: The Group has diversified its earnings and delivered superior returns to its shareholders by expanding into vertical and in horizontal adjacencies. Grays’ integration is progressing well, and it continues to grow strongly in its traditional fleet business. ROE in 2017 was 7.1 per cent, slightly below 2016 figure of 7.6 per cent. Percentage of Debt in Capital Employed in 2017 was 51.5 per cent whereas, in 2016, it was 53.6 per cent. Eclipx continued to diversify its funding investor base across all classes of notes in its warehouses and bond issues which resulted in reduction in Eclipx funding costs. The stock price was down by 8.5 per cent in the past six months but managed to climb up 1.39% in the last five days. We give a “Speculative Buy” recommendation at the current price of $3.65, given the efforts on earnings diversification and cost reduction.
 

ECX Daily Chart (Source: Thomson Reuters)

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