Australia | Nov 10 2017
EclipX fleet operations appear stable, despite increased competition, while impairments are benign and end-of-lease outperformed in FY17. All up, brokers are increasingly confident in the outlook.
-Transforming into a diversified financial services company
-Low-cost funding model a differentiator
-Right2Drive expected to be a key performer going forward
By Eva Brocklehurst
All divisions of fleet management and vehicle leasing business EclipX ((ECX)) were firing in FY17. Aided by acquisitions, growth was up around 10%. Fleet operations appear competitive but stable, impairments are benign and end-of-lease income outperformed. Strong momentum in Right2Drive and Grays synergies further underpin the FY18 outlook.
The company has guided to FY18 net profit growth of 27-30% and growth in earnings per share of 10-12%. UBS understands FY18 will include a step-up in investment of $2m year-on-year to support process and platform improvements, as well as growth initiatives in adjacent markets.
While conditions remain competitive in fleet markets, the company's low-cost funding model remains a key differentiator in the broker's view, especially while funding conditions are favourable.
Citi upgrades to Buy from Neutral to complete a total of five from five Buy ratings on FNArena's database. The broker believes EclipX is continuing to transform into a diversified financial services company, growing its B2B and B2C platforms. Guidance is conservative, the company has witnessed no material change in competition and expects to grow at a multiple of system fleet growth. This appeals to the broker.
Deutsche Bank found strong evidence costs were under control although new business growth is showing signs of slowing in Australia and particularly so in New Zealand. The broker also believes FY18 will be the test of management's ability to execute on its strategy. Upside risks are envisaged from new revenue channels and Deutsche Bank suggests the stock offers solid earnings growth at an undemanding valuation.
Right2Drive
The improving maturity profile of the Right2Drive network and roll-out to 40 branches by the end of the year is expected to sustain FY19 momentum. Other initiatives and revenue synergies should also support confidence in FY18/19 and UBS notes $275m in unrestricted cash and undrawn facilities while funding conditions are also highly favourable.
Morgan Stanley puts guidance for FY18, which was below estimates, down to a track record of being conservative and investing in initiatives to deliver growth in the consumer division. Right2Drive was the biggest contributor and there was growth in new business in the core fleet as well as strong and-of-lease income.
Right2Drive revenue and volume of hires were above expectations and Morgan Stanley believes the performance justifies a belief that Right2Drive will be key to growth going forward. The broker expects double-digit growth in earnings per share as the cost base is leveraged, Right2Drive lifts from a low base and Grays is integrated to capture more from the disposal of vehicles.
Grays
One lingering concern is that diversification increases complexity and reduces visibility, both from an operations and investor perspective. In this case Deutsche Bank envisages FY18 is a pivotal year in delivering on the Grays revenue synergies opportunities.
Citi does point out that EclipX needs to increase the average car sale price in the Grays channel to attract the customers that fit its ex-fleet stock, and there may be some execution risk in system consolidation over coming years.
Credit Suisse also envisages FY18 guidance is relatively low risk, given the strong momentum in Right2Drive and the synergy-driven growth in Grays. The company is factoring in only cost synergies to expectations for Grays in FY18 and Credit Suisse suggests this may prove conservative, given potential cross-selling and other revenue opportunities. Nevertheless, this is considered appropriate at an early stage and supports confidence in the company's guidance.
On the database the consensus target is $4.61, suggesting 6.0% upside to the last share price. The dividend yield on FY18 and FY19 forecasts is 4.1% and 4.7% respectively.
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