Eclipx Group Limited

ECX Details

Becoming a Substantial Holder: Eclipx Group Limited (ASX: ECX) provides fleet management services and has operations in Australia and New Zealand. On 19^th October 2021, Vinva Investment Management Limited became an initial substantial holder in the company with a voting power of 5.10%.

1HFY21 Financial Summary:

• Growth in Net Operating Income: During the half-year ended 31 March 2021, the company recorded a rise of 22% in net operating income to $105.9 million. The growth was mainly fueled by a higher financing margin generated by lower interest expenses and higher end-of-lease income produced by increased demand for used cars as well as record-high prices for used cars, which was resulted from the shortage of supply in Australia and New Zealand.
• Growing EBITDA: Earnings before Interest, Tax, Depreciation & Amortisation (EBITDA) for the period amounted to $66.5 million, indicating a like for like growth rate of 43% against 1HFY20.
• Increase in NBW: The group managed to generate growth of 11% in new business writings (NBW) as compared to 2HFY20. This was achieved in spite of the global vehicle supply disruption chain constraining vehicle deliveries.

Net Operating Income (Source: Analysis by Kalkine Group)

Key Risks:

• Macro-Economic Risk: The company’s business is exposed to risks arising from the macro-economic crisis like COVID-19 pandemic, which may impact the company’ s financial and operational health.
• Residual Value Risk: ECX is exposed to lease residual value risk on motor vehicles which leads the Group to the movement in second-hand prices of these assets.

Outlook:

• Looking forward, the company is optimistic that the current tender activity & strategic pathways may support a sustainable growth outlook.
• The company is also in a decent position to take a leading position in its target markets in a normalised environment. However, the company is cautious about the global supply chain disruption for new vehicles, which is likely to continue for some time.
• ECX is scheduled to release the FY21 results on 3 November 2021.

Valuation Methodology: P/E 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 on 31 March 2021, the company had unrestricted cash of $58.6 million. The stock of ECX is trading above its 52-week low-high average of $1.420 - $2.560, respectively. The stock gave a positive return of ~26.02% and ~51.53% in the past six and nine months, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a correction of mid-single-digit (in % terms). The company can trade at a slight discount to its peers’ median P/E multiple, considering the COVID-19 uncertainties, declining inflows in operational cash, and falling cash receipts. For the purpose of valuation, peers such as Money3 Corp Ltd (ASX: MNY), Humm Group Ltd (ASX: HUM), SG Fleet Group Ltd (ASX: SGF), and others have been considered. Considering the expected correction, solid rally in the past few months, current trading levels and key risks associated with the business, we suggest investors to book profit, and give a ‘Sell’ rating on the stock at the current market price of $2.510, as on 28 October 2021, 12:16 PM (GMT+10), Sydney, Eastern Australia.

ECX Daily Technical Chart, Data Source: REFINITIV  

Note: The purple colour line in the chart depicts RSI (14-period).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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