Small Caps | Nov 15 2019
A tighter focus on core leasing business has allowed EclipX Group to improve its balance sheet position while harnessing technology that is opening up untapped market opportunities.
-Gross net debt expected to reduced to $175m by FY21
-Progress being made on disposal of Right2Drive and CarLoans
-Potential for sector consolidation
By Eva Brocklehurst
The road ahead has become smoother for EclipX Group ((ECX)) after a turbulent year of downgrades, asset disposals and impairments. Brokers perceive earnings risk for the core business is to the upside now.
This stems mainly from novated leasing and the fleet processing technology that is opening up untapped market opportunities. The company's focus is on de-leveraging, and gross net debt is expected to reduce to $175m by FY21 through additional asset sales.
Credit Suisse notes some early wins have already been realised through the sale of non-core assets, such as Grays and AreYouSelling, and pressure has been alleviated from the balance sheet. While the share price has benefited accordingly, the broker suspects further gains will be more gradual.
Nevertheless, there remains room for upside from growth in underlying earnings, mainly through cost reductions and a further reduction in net debt. There is also the potential disposal of Right2Drive. The restructure of Right2Drive is progressing, with branch numbers reduced to 24 and a focus on collections that has meant the debtor book will decline to $78m.
Macquarie finds the investment case attractive and believes the potential for sector consolidation could accelerate the realisation of value in the stock. The broker notes Right2Drive and CarLoans are held at $38m net sale value, with operating performance expected to break even in FY20. The exit of the CarLoans business appears to be more progressed than Right2Drive.
FY19 results were messy with multiple one-off items. Still, core assets under management or financed grew 4%, supported by an acceleration in novated lease writing. In FY19 cash net profit of $46.5m compared with $57.6m in FY18, albeit with stable net operating income and temporarily inflated costs.
During the second half new business written for novated leases grew 20% sequentially and, Macquarie highlights, this is against a backdrop of declining new private car sales.
Fleet and novated businesses were in line with UBS estimates helped by a reduced contribution from the non-core and divested operations. The broker considers dividends likely from the second half of FY21 and continues to forecast core net profit in FY20 of $48m.
UBS assesses the outlook commentary around the fleet business is incrementally positive, noting a 97% retention rate and new order pipeline at three-year highs.
The technology opportunities include small-medium enterprises which remain largely under-penetrated by peers in the domestic market. The ability to warehouse novated leases is also a tailwind, in the broker's view, in light of tightening credit conditions from the banks funding the company's peers. UBS also emphasises the potential for synergies under a consolidation scenario.
FNArena's database has four Buy ratings and one Hold (Morgan Stanley, yet to comment on the results). The consensus target is $1.86, suggesting 8.7% upside to the last share price. Targets range from $1.35 (Morgan Stanley) to $2.20 (UBS). The dividend yield on FY20 and FY21 forecasts is 3.3% and 5.0% respectively.
See also, Waxing Interest In EclipX on October 8, 2019.
Disclaimer: the writer has shares in the stock.
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