Small Caps | Jul 09 2019
Brokers welcome the prompt sale of two non-core businesses and the reduced risk of EclipX breaching its corporate debt covenants.
-Good first test of the credibility of new management
-Right2Drive vehicle leasing remains the largest division to be divested
-Upside now considered outweighing the downside
By Eva Brocklehurst
Vehicle leasing and salary packaging specialist EclipX ((ECX)) has been prompt in finding a buyer for its GraysOnline and AreYouSelling businesses, consequently reducing the risk of breaching its corporate debt covenants. Risks remain elevated but brokers consider these more manageable now.
The sale attracted a combined value of $60m and will generate a non-cash loss of -$100m. Proceeds will be applied to reducing corporate debt and lenders have agreed to remove the non-cash loss from covenant testing. The price received exceeded the amount allowed for the businesses, and Credit Suisse believes this provides a good first test of the credibility of new management.
There are several more catalysts for the near term, ahead of the results in November, which include the refinancing of corporate debt, further non-core asset sales and more cost cutting. The company will likely wear some stranded costs as more businesses are exited.
UBS believes the stock is attractively valued, estimating core net profit of $47-57m in FY19-20. As sector consolidation continues to be a feature, the broker assesses there are around $20-40m in synergies available in such a scenario.
The sale is a positive first step towards a renewed focus on the core business, Morgan Stanley asserts. Other non-core assets include commercial equipment, CarLoans and Right2Drive. GraysOnline, at $40-60m, made up the majority of the broker's valuation of $90-130m for non-core units.
Right2Drive is the largest of the remaining businesses to be divested. Citi points out Right2Drive and Onyx in this division were bought for $67m and $10m, respectively, but have since had their goodwill fully written down.
Despite lower values being realised for the latest sales, the broker points out that in the past, other companies have been awarded for increasing the focus on their core, including GUD Holdings ((GUD)), which disposed of Dexion, Oates and Sunbeam, and GWA Group ((GWA)), which sold Gliderol and Brivis.
Ideally, Right2Drive should now be disposed of prior to the end of the company's financial year in September. Credit Suisse, in holding this view, notes macro economic conditions remain subdued and end-of-lease income trends are negative.
Still, the broker considers the upside is outweighing the downside at the current valuation. Upgrades to estimates stem from cash flow and balance sheet revisions as a greater reduction in corporate debt is factored in.
FNArena's database shows four Buy ratings and one Hold (Morgan Stanley). The consensus target is $1.57, suggesting 4.7% upside to last share price. This compares with $1.44 ahead of the divestment announcement.Targets range from $1.29 (Citi) to $1.80 (UBS).
See also, Glimmer Of Light Visible For EclipX on June 4 2019
Disclaimer: the writer has shares in the stock.
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