Financial Services

Eclipx Group posts best interim result in 40-plus years

Thu 05 May 22, 3:06pm (AEST)
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Key Points

  • Net profit growth up 57% to $59.4m for the six months ended March 31
  • Used car prices up more than 30%
  • Management flags a $40m on-market share buyback as the most efficient capital distribution to shareholders

It’s been a strange fortnight for Eclipx Group (ASX: ECX) with the fleet lease and management services provider’s share price up 2.8% 26 April – on the back of no news – and relatively flat today after announcing a strong first half result this morning.

The share price quickly rallied as high as $2.84 after the car leasing group flagged used car prices remain considerably higher than what they were before the pandemic.

However, 20 minutes later the company gave up virtually all its early morning gains at around $2.70.

No dividend

What may have irked the market this morning were revelations the company is reneging on paying shareholders a first-half dividend.

Given the group continues to be a beneficiary of the Australian Federal Budget’s instant asset write-off policy, it does not have distributable franking credits.

But in the absence of franking credits, management has – in light of the strong 1H performance - flagged a planned $40m on-market share buyback as the most efficient capital distribution to shareholders.

In case you were wondering, an on-market share buy-back program of up to $40m reflects a capital pay-out ratio of 65% of 1H22 net profit.

Management expects to resume paying dividends by 2024 or 2025 once its franking credits balance has increased.

What does Eclipx do?

To the uninitiated, Eclipx is a mid-cap stock (market cap of $807m a little outside the ASX300) which operates brands including FleetPlus, FleetPartners and FleetChoice.

The group has 93,000 vehicles on its books via fleet management arrangements and novated leases.

Bumper half year

Much of the group’s strong interim net profit growth – up 57% to $59.4m for the six months ended March 31 – is being attributed to elevated valuations of vehicles at the end of three-year or four-year leases in a market.

Underpinning the interim result were used car prices which are up more than a whopping 30% compared with pre-pandemic levels.

Highlights within today’s half year result included:

  • End of lease income of $51.4m, up 60% compared with a year ago

  • The average end of lease income per vehicle jumped 48% to $8,813

  • Used car prices expected to remain at current elevated levels until at least early 2023

  • New Business Writings (NBW) grew 19%

  • Net operating income (NOI) of $133.6m, up 26%

  • Earnings (EBITDA) of $95.0m, represents like-for-like growth of 43%

  • Net corporate cash of $6.8m provides maximum balance sheet flexibility to pursue opportunities

  • The group has reduced net debt by $263m since March 2019 and had a net cash position of $6.8m at 31 March 2022

What's equally noteworthy is that NBW is one of the Group’s most profitable segments, having grown at more than 30% - adding growth in assets under management for the first time in three years.

Best 1H ever

CEO Julian Russell notes that today’s interim was the best half-year result in the company’s 40-plus year history.

Russell noted that while demand from corporate customers for electric vehicles was on the rise, supply constraints, especially on semiconductors - a vital component in modern vehicles which rely heavily on electronic circuitry - were also a big issue in that segment.

“The challenge is really around the supply of these vehicles… they’re coming, and we’re getting prepared for it,” he said.

Outlook

With the group now in the best financial position - with no net debt – Russell highlighted maximum balance sheet flexibility to capitalise on future opportunities as they emerge.

While the supply chain for new vehicles remains constrained, the group expects a continued elevation in used car market prices relative to pre-covid levels.

Order books are expected to remain elevated, and gradually convert into NBW, and therefore recurring NOI in due course.

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Eclipx share price over 12-months.

What brokers think

Based on the brokers that cover Eclipx (as reported on by FN Arena) the stock is trading with 7% upside to the target price of $2.89.

Consensus on Eclipx is Moderate Buy.

Based on Morningstar’s fair value of $3.08, the stock appears to be undervalued.

Due to used car prices staying stronger for longer, plus the benefit from elevated end-of-lease income, Credit Suisse, Macquarie and Morgan Stanley share Buy (or similar) recommendations, with price targets ranging between $2.82 and $2.95.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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