Stocks’ Details

Eclipx Group Limited

A Look at Recent Market Update: Eclipx Group Limited (ASX: ECX) had recently released the market update in which it stated that it remains compliant with the corporate debt covenants, both at the last formal testing date, which is 30 September 2018, and as at February 28, 2019 (i.e., last calculation date based on management accounts). The company’s net debt stood at $283.7 million as at 28 February 2018 which might get reduced in March because of business cash flows as well as treasury asset management activities.


Corporate Debt Covenant Limits (Source: Company Reports)

From the analysis standpoint, we expect that the company is having sound fundamentals as it has been generating decent RoE from the past few years reflecting that the ECX has been quite efficient in delivering returns to the shareholders. In FY 2018, its RoE stood at 7.1% which can be considered at decent levels.

ECX Targets Cost Reduction: Eclipx Group is targeting the cost reductions amounting to $20 million in the span of the next 18 months. A transformation office, with a reporting line to Board of Directors, would be implementing the cost reduction program. The sources for the cost reduction would include rationalisation of property footprint, simplification of head office and shared services, integration of NZ fleet and commercial and the consolidation of novated platforms.

Stock Recommendation: In the update for five months to February 28, 2019, the company stated that it there are anticipations that full year FY19 result for its core fleet and novated businesses might be broadly in line with FY18. These businesses, together with Commercial, have garnered $61.2 million of NPATA (Fleet, Commercial and Novated) in FY18. The company’s annual dividend yield stood at 28.07% which is significantly higher than the industry median (Financials) of 5.5%.

While the annual dividend yield looks inflated, the group aims to take manageable recourse to cost reductions, and this might gain some attention going forward. Thus, we maintain our “Hold” recommendation on the stock at the current market price of A$0.700 per share (up 22.807% on 27 March 2019 following the release of market update).
 

Challenger Limited

Expansion of strategic relationship with MS&AD: Challenger Limited (ASX: CGF) had recently announced that it further progressed the strategic relationship with MS&AD Insurance Group Holdings Inc. so that CGF’s strategy with respect to growth in Australia and Internationally can be supported. MS&AD also has the intention to increase its CGF shareholding to more than 15% of the issued capital and seek representation on the board of CGF after the necessary regulatory approvals and market conditions. In another release, CGF made an announcement about the Dividend Reinvestment Plan (DRP) issue price for the 2019 interim dividend which is $8.1695 per share. The DRP issue price represents the simple average of the daily volume weighted average share prices over the ten trading days from 1 March to 14 March 2019. The participation rate of DRP stood at 3% of all the issued shares. The New Challenger share would be issued to satisfy the DRP requirements and 411,192 ordinary shares have been issued on March 26, 2019. In 1H FY 2019, the company’s assets under management amounted to $78.4 billion which reflects the rise of 2% on prior corresponding period (or pcp).

Assets Under Management (Source: Company Reports)

What to Expect From CGF: In 2H FY 2019, Challenger Limited would continue to build the relationships and the company also plans to actively manage Life’s investment portfolio. Moreover, during the same period, it plans to add new funds management products. The company happens to be strongly capitalised and there are expectations that the capital intensity would reduce further.

Stock Recommendation: Meanwhile, the stock price has fallen 15.89% in the last three months and is trading close to a 52-week lower level making it a decent buy opportunity. Coming to valuations of the stock, the company’s P/CF ratio stood at 7.5x which reflects that the stock is slightly undervalued as compared to the industry median (Financials) of 11.9x. The company is possessing a strong risk management culture and capability.  Hence, considering the aforesaid facts, we maintain our “Buy” rating on the stock at the current market price of A$8.020 per share (up 1.008% on 27 March 2019).
 

G8 Education Limited

Decent Outlook: The Managing Director of G8 Education Limited (ASX: GEM) had stated that the company’s profit and cashflow results demonstrate disciplined management of the company’s portfolio amidst the challenging market conditions. The company posted an underlying EBIT of $136.3 million in CY 2018 which was in line with the guidance of management and it demonstrates the effect of improved occupancy as well as wage performance.


Cashflow (Source: Company Reports)

The company’s net cashflows from operating activities amounted to $105.9 million which reflects the rise of 15% on YoY basis mainly because of the timing of payroll and lower interest costs. The company’s total capex amounted to $36.8 million in CY 2018 which is approximately $6.8 million more than the estimate which was given in August 2018 and this was because of acceleration of refurb and refresh program, educational equipment/resources and upgrades with respect to IT/wifi. 

What to Expect From GEM: In CY 2019, there are anticipations that incremental earnings from prior year acquisitions might be around $10 million. The company stated that result for CY19 would be weighed by cessation of annual license fee revenue amounting to $4 million following the mutually agreed termination of the broker exclusivity agreement. However, there are anticipations that this would be absorbed by improved YoY wage performance. 

Stock Recommendation: Over the past few months, the stock of G8 Education has delivered decent returns. In the span of the previous 6 months, the stock has posted 44.50% return while, in the past three months, it posted a 2.85% return. However, it was down 9.4%. From the valuations perspective, the stock seems to be fairly valued as its P/B ratio stood at 1.5x as compared to the industry median (Consumer Non-cyclicals) of 1.5x.  Based on the foregoing, we maintain our “Hold” rating on the stock at the current market price of A$2.900 per share (up 0.346% on 27 March 2019).  
 

Stock Price Comparative Chart (Source: Thomson Reuters)       

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