Small Caps | Jun 04 2019
As expected, EclipX delivered a very weak first half, posting losses in four out five of its adjacent businesses. Yet brokers believes upside has emerged if the focus can return to the core operations.
-Novated leasing the stand-out performer in the first half
-Potential suitors could be encouraged by current valuations
-Debt re-financing expected to conclude by the end of 2019
By Eva Brocklehurst
Light is appearing at the end of the dark tunnel for EclipX ((ECX)), as new management separates out its core business of novated leasing and fleet management. On the market are Grays, Right2Drive and commercial leasing, a substantial disappointment in the first half results. Of the company's five adjacent businesses four were loss-making and only Grays profitable.
Novated leasing stood out, with written new business up 10%, financed assets up 12% and fleet volumes up 14%. While the core fleet business felt the impacts of a softer cycle and distractions, operating earnings (EBITDA) rose 2%. However, overall, net profit was sharply below broker estimates. The result included $118m of goodwill impairments related to Grays and Right2Drive, in line with guidance.
Morgan Stanley believes the decision to separate the performance of the core business will allow the market to have more conviction in the trajectory and assign a multiple that is more representative of the quality of the business. UBS agrees the market will begin to ascribe value to the core holdings and, in light of a softer economic backdrop and corporate sentiment, expects mid single-digit growth for the fleet and novated segments in FY19-21.
Citi was pleased with the candid nature of new CEO Julian Russell's presentation, noting that the upside is tangible even if EclipX "just turns off" CarLoans.com.au and AreYouSelling. This ability to shut down loss-making segments and extract asset value if a sale is not possible provides greater confidence, UBS agrees. These two businesses collectively lost -$2.4m because of lower appetite for credit and low-yielding aged stock.
While there was no clarity regarding progress on the proposed divestments, Citi notes that value is present in the core business, and potential suitors could be strongly encouraged at current valuations levels.
Macquarie likes the articulation of a simpler business going forward and assesses the progress of re-setting corporate debt facilities is an indicator that the flagged asset sales could be at or near completion in the next four months. To be able to meet the company's timeframe, this implies interested parties are already in sight.
Credit Suisse has upgraded to Outperform from Neutral in the wake of the results, largely as risk appears to have swung to the upside. A stable core business should be able to maintain current earnings and the broker is increasingly comfortable that the balance sheet can be repaired.
The company floored investors earlier this year after flagging a sharp fall in profits for the first half and, then, McMillan Shakespeare ((MMS)) took its merger proposal off the table.
Macro conditions could still pose challenges and Credit Suisse remains wary of a lack of financial oversight in various areas of the business which came to light recently. Still, while high risk, the core business is now a lot more “salvageable” and corporate interests could re-emerge, providing upside risk, in the broker's view.
Debt Risk Reduced
UBS believes medium-term growth will be driven by the improved operating performance and cost optimisation, while the probability of breaches to the debt covenants have materially reduced. This has come from the refinancing of corporate debt facilities, expected by the end of the year and greater confidence in the non-core asset sale program.
Morgan Stanley also expects risks to the balance sheet will ease, although net debt/EBITDA was 2.68x and uncomfortably close to covenants at 2.7x. Management has indicated net debt should fall below 2x after the disposal of Grays, Right2Drive and the commercial equipment business, which implies a value of $90-130m for these assets.
Morgan Stanley retains an Equal-weight rating, as pressure was observed in the end-of-lease profits per vehicle over the half-year, which could indicate risks around residual values. Management has attributed this to the mix but the broker awaits further confirmation.
FNArena's database shows four Buy ratings and one Hold (Morgan Stanley). The consensus target is $1.44, signalling 7.5% upside to the last share price. This compares with $ Targets range from $1.29 (Citi) to $1.66 (Macquarie). The dividend yield on FY20 forecasts is 6.3%.
See also, EclipX Rising Or Eclipsed? on April 1, 2019.
Disclaimer: the writer has shares in the company.
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