Small Caps | Oct 08 2019
EclipX Group is reverting to focus on its core fleet and novated leasing businesses, and interest in the company is only expected to grow.
-Right2Drive, CarLoans remain the key non-core divestment opportunities
-Reduced likelihood of breaching debt covenants
-Takeover attraction likely to gain momentum
By Eva Brocklehurst
EclipX Group ((ECX)) is progressing with a simplification strategy, making the business more attractive as a stand-alone operation. As a result, brokers increasingly emphasise sector consolidation as a theme. The company's focus will revert to the fleet and novated lease businesses and Right2Drive has been set aside, with the company exploring all options for both the front and back books.
EclipX Group divested its commercial equipment finance business in the last month, leaving just Right2Drive and its CarLoans businesses as non-core. UBS expects an exit of Right2Drive and CarLoans will occur in FY20 and now assumes $40m as a base case from the sale, versus $25m in previous estimates.
Citi has removed losses from the commercial equipment finance operation from estimates, upgrading FY20 forecasts for earnings per share by 15% as the model is rolled forward, with divestment of the remaining businesses contributing half of its target of $1.96.
The company has announced a $15m cost optimisation plan for its core business over FY19-21. UBS calculates an implied pro forma FY20 net profit of $58m and envisages upside risk for core income growth as earnings are positively affected by divestments and cost optimisation.
The cost base is expected to reduce to $83m by FY22 from $141m in FY19. Growth should also come via increased novated leasing penetration and leasing to small-medium business as well as operating leverage.
UBS reduces FY19-20 estimates by -16-18% to take into account the underperformance of the non-core businesses as well as stranded costs and does not anticipate the company will breach its corporate debt covenants, given the now higher estimate for the monetisation of non-core operations.
Macquarie anticipates the company will be a target in the consolidation of the fleet and novated lease sector in Australasia and Citi agrees the core leasing operation could prove attractive to suitors, which will only garner momentum as the underperforming operations are discarded.
There are four Buy ratings and one Hold (Morgan Stanley) on FNArena's database. The consensus target is $1.81, signalling 4.7% upside to the last share price. Targets range from $1.35 (Morgan Stanley) to $2.20 (UBS).
See also, Divestment Lauded As EclipX Reduces Risk on July 9, 2019
Disclaimer: The writer has shares in the company.
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