Small Caps | Nov 13 2020
Notwithstanding the challenges posed by the pandemic, EclipX produced strong earnings growth in FY20 and enters FY21 as a more efficient business unit.
-A number of new fleet accounts won in the final quarter of FY20
-Corporate leasing activity continues to improve
-Strong cash generation expected to support debt reduction
By Eva Brocklehurst
EclipX Group ((ECX)) has embarked on FY21 as a leaner, more efficient unit having finally offloaded all non-core segments to focus on its fleet exposure and growing novated leasing business.
Notwithstanding the challenges posed by the pandemic, earnings growth was strong in FY20 amid a combination of cost reductions, a lower interest burden and increased end-of-lease (EOL) income.
No firm income guidance was provided but UBS calculates a $9.5m cost benefit that should drive 19% growth in earnings per share in FY21. UBS believes the business is well-positioned for growth across novated leasing, being materially under-penetrated across eligible customers.
Credit Suisse assesses it will take time for new business to reach pre-pandemic levels but improved momentum in both fleet and novated leasing as well as efficiency benefits should procure growth in FY21.
Assuming conditions become more normal in FY22, additional growth should be forthcoming. During the final quarter of FY20 increased tender activity meant the company won a number of new fleets.
Core net profit was $47.5m and the $33.3m in EOL income was better than Morgan Stanley expected. The broker assesses the drivers of growth should come from areas such as corporate fleet customer wins and further penetration of the novated leasing and small-medium enterprise (SME) fleet markets.
Macquarie also expects growth in these areas will underpin margins, assessing the fleet market's competitive environment is rational despite a challenging operating environment, and noting EclipX has also pulled back from the lower-margin panel business.
While net operating income was reduced because of lower new business and higher credit impairments, which Macquarie notes is largely attributed to disruptions caused by the pandemic, this was offset by the higher EOL income and lower costs.
Used vehicle prices also supported the business, although brokers suspect used vehicle market conditions will moderate. Novated and corporate leasing activity averaged around 80% of pre-pandemic levels and continued to improve over the second half.
Debt Reductions
UBS upgrades FY21 estimates by 12% and believes the result has marked the completion of the company's simplification strategy. Strong cash generation is expected to support net debt reduction to $46m. Credit Suisse agrees liquidity has been well managed and the balance sheet, having been compromised previously, has strengthened over the past two years.
Macquarie welcomes the credit risk mitigation, noting 81% of the exposure of the top 20 customers is investment grade. Around 95.5% of the portfolio now represents low-risk customers, many being in essential services.
FNArena's database has four Buy ratings for EclipX Group with a consensus target of $1.95, suggesting 11.6% upside to the last share price.
Disclosure: The writer has shares in the company.
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