Eclipx Cruising On Market Freeway
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Eclipx combines commercial fleet leasing - for small-to-medium-sized enterprises (SMEs) up to major corporates – with a high-growth consumer business that provides loans to consumers and originates their business online.
When the initial public offering (IPO) prospectus of Eclipx Group Limited (ECX) was doing the rounds early last year, some investors may have balked at two words – salary packaging.
The market still had horrible memories of 2013, when the Rudd Labor government moved to tighten fringe benefits tax (FBT) guidelines on car leasing and salary-sacrifice packaging, a surprise that cut the market valuation of vehicle leasing and salary packaging group McMillan Shakespeare (MMS) in half. It has been a long road back to recovery for McMillan Shakespeare – its earnings have recovered to the levels before that announcement, but it share price remains 20 per cent short of where it was – but investors could have been forgiven for blanching at those two words.
If they looked deeper at the Eclipx prospectus, however, they would have realised that salary packaging was only 10 per cent of its business: and in the rest of it, fleet leasing and management services, equipment finance, novated leasing and car loans in Australia and New Zealand, it was a major player.
Investors who read deeper and picked up on the fact that Eclipx had a unique business proposition, in that it owns most of its cars, funding them with bank loans, and funds its loans to consumers by securitising them – as a bank or non-bank lender would – and liked the idea, would be congratulating themselves.
And these outweighed the doubters: the Eclipx offer was heavily over-subscribed. Issued at $2.30, after raising more than $250 million, Eclipx shares roared on to the ASX screens in April 2015 – ending their first day at $2.78, up 29 per cent – and after a slump over the summer, they have resumed rising, pushing to $3.74. Eclipx’s market capitalisation at listing of $518.4 million has become $959 million. In June this year Eclipx joined the S&P/ASX 200 Index.
Eclipx owns five major brands, namely:
- FleetPartners: a leasing and fleet management company, managing more than 50,000 vehicles, from passenger cars to heavy commercial vehicles, across Australia and New Zealand;
- FleetPlus: a fleet leasing and management company in Australia and New Zealand, specialising operating leasing, fleet management, novated leasing and salary packaging;
- CarLoans.com.au: an online service that helps people to secure the best car loan to suit their needs;
- Fleet Choice: provides fleet management and salary packaging administration services for organisations and individuals across Australia; and
- Right2Drive (R2D): an accident replacement car rental business, providing not-at-fault drivers with like-for-like replacement vehicles after an accident, across Australia and New Zealand.
Eclipx combines commercial fleet leasing – for small-to-medium-sized enterprises (SMEs) up to major corporates – with a high-growth consumer business that provides loans to consumers and originates their business online.
The company broadly operates two business models. The first is the self-funded model (used mainly by FleetPartners), where Eclipx buys vehicles to lease to customers and earns a spread, or net interest income, which is the difference between the interest income it receives from customers and its cost of funds. Eclipx recognises net interest income over the life of the lease.
The second is a third-party-funded model (used primarily by FleetPlus, CarLoans.com.au and Fleet Choice), where Eclipx acts as a broker or agent, arranging vehicle financing for the customer from third-party banks and financial institutions.
Under this model, Eclipx earns most of its revenue from upfront brokerage commissions paid by the third-party funders. On top of net interest income and upfront brokerage commission, Eclipx earns management and maintenance fees, ancillary revenue from related products and services and end-of-lease income.
The fifth brand, R2D, is a special case. Eclipx bought the company in May, in its first acquisition as a listed company, funded by a share issue at $3 a share. R2D calls itself “the Uber of the smash repair industry.” Eclipx knew it well, having supplied it with cars for years, and knew it was the dominant player in the highly fragmented accident vehicle replacement sector. In fact, Eclipx stated at the time that the market was “relatively immature and underdeveloped, with significant growth opportunities as consumers and corporations become aware of their rights to have access to loaned vehicles if their car has been involved in an accident that was not their fault.”
Across its fleet management portfolio, Eclipx works hard to unlock the “hidden costs” in fleets to create a unique point of difference. It uses vehicle maintenance data, trip data and emissions data to benchmark and set its pricing, uses used-car sales data to set competitive residual values and plan what it will do with vehicle at the end of the lease. It uses vehicle data to renegotiate leases to match changes in vehicle usage. Finally, it matches that with customer credit data.
This strategy is backed by investment in technology, including Eclipx’s partnership with LogbookMe, an Australian technology company specialising in vehicle telematics (wirelessly transmitted data.) Eclipx has an exclusive partnership for fleet with LogbookMe until 2024: LogbookMe’s device and app delivers trip data to corporate fleet managers to help them to manage fleet size and costs, enabling them to reduce FBT on vehicles and parking, and helping them to identify under-used vehicles and reduce fleet sizes. The system gives accurate reporting and all tax savings reports have Australian Taxation Office (ATO)-approved rulings. It also gives companies valuable OH&S data about their fleet users, for example, how long they are spending driving, and what speeds they are doing. Eclipx says the LogbookMe system is helping it to win tenders, driving a strong new business pipeline.
Eclipx lifted its first-half 2016 profit by 9 per cent to $26 million, meeting the top end of its guidance. The company upgraded its AGM guidance of 7 per cent–10 per cent growth in earnings for 2016 to an 8 per cent–10 per cent rise in full-year after-tax profit. This does not include the R2D purchase, which Eclipx says should add a small amount to its 2016 income, with the acquisition likely to return "high single digit" percentage growth in earnings per share in the 2017 financial year.
On FN Arena’s collation, analysts are looking for EPS of 22.3 cents and DPS of 14 cents when Eclipx reports FY16 results – the company’s year-end is September 30 – rising to 25.9 cents and 15.8 cents respectively in FY17. At $3.74, that prices ECX on 16.8 times expected FY16 earnings and 14.4 times expected FY17 earnings, and on a FY16 expected yield of 3.7 per cent, rising to 4.2 per cent in FY17.
The analysts’ consensus target price is $3.93, implying upside of 4.9 per cent. On Thomson Reuters’ numbers, analysts have a consensus target price of $4.10 on the stock, with a 4.3 per cent yield in FY17. Eclipx is not going to shoot the lights out from here, but it is a good example of a stock that has done virtually everything right in its time on the stock exchange, and is going places steadily.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au