Fleet and equipment leasing business EclipX ((ECX)) has delivered 20% growth in net profit in its first half, at the top end of market guidance. This was supported by the consumer business as well as new growth in business volumes and profitability in fleet.
First half results were in line with expectations and the company has reaffirmed guidance for FY17 yet the real surprise for brokers was the announcement of the acquisition of Grays eCommerce ((GEG)) for $179m.
Grays eCommerce Merger
Grays is an online marketplace with 85% of sales relating to business-to-business (B2B). Grays also has a wine auction business, its original enterprise. The directors have unanimously recommended the merger in the absence of a superior proposal. Subject to shareholder approval the scheme is expected to be implemented in August.
Shareholders will receive a fixed exchange ratio of 0.3656 EclipX shares for each Grays share held. Moelis calculates this is equivalent to a price per share of $1.39, based on the EclipX closing price of $3.80.The broker understands the rationalisation of the business-to-consumer (B2C) segment is going smoothly and investment in the B2B business has underpinned future growth for Grays.
EclipX has a growing commercial equipment finance business, while Grays B2B auction business accounts for around 90% of its revenue. This provides Eclipse with an opportunity to leverage the customer base and offer equipment finance through the plant & equipment online auction.
Also, the automotive auction platform offers another channel to market finance, insurance and warranty products, as well as dispose of vehicle assets at the end of a lease.
The company expects high single digit accretion from the acquisition, including $20m in synergies within 12-24 months. EclipX intends to grow the Grays plant & equipment auction and automotive options, restructure certain consumer segments and reduce costs, targeting operating earnings (EBITDA) from Grays of $23-25m in FY18.
At first blush Credit Suisse observes little obvious strategic fit but, on further analysis, finds that the rationale is sound. The company should be able to achieve most of its synergy objectives, acquiring a business centred on commercial equipment and vehicle online auctions with opportunities to provide its own product and optimise end-of-lease fleet disposal.
The downside is limited and the upside is attractive, Credit Suisse concludes, if execution is successful.
Macquarie finds the acquisition interesting but the strategic rationale less clear. While the broker accepts the financing and residual vehicle disposal opportunities, it notes the average vehicle value at Grays is materially lower than the EclipX average used-vehicle value.
Deutsche Bank finds interesting strategic angles around used car distribution and automotive finance but remains cautious about the added complexity. The deal appears marginally accretive based on the broker’s estimates but upside is envisaged coming from new revenue opportunities.
The acquisition adds distribution but execution is paramount to the outlook, Citi believes, and agrees cross-selling may prove challenging because of the pricing differential between vehicles.
Excluding the contribution from Grays, EclipX is considered on track to deliver FY17 net profit growth of 18-21% through continued growth in assets and increased services-based revenues. Citi considers the company’s above-market growth, while maintaining margins, is a solid outcome especially as competitors have cited increased competition in the market.
While acknowledging clear growth opportunities from Grays, Morgan Stanley agrees the EclipX business will become more complex. The broker notes management has indicated that success with the merger will not hinder its ability to assess LeasePlan, which is up for sale. LeasePlan is the largest local fleet leasing company and presents a significant opportunity for Eclipse in terms of consolidation.
Grays intends to apply the proceeds received under its lease variation at Lidcombe to the payment of a dividend. Should this dividend be paid, the scheme consideration would not be adjusted. Moelis adds the intended 5.6c per share dividend to its FY18 dividend estimates, resulting in a total of 7.2c for the year. Moelis forecasts core net profit for Grays of $8.3m in FY17 and $10.3m in FY18.
The broker’s rating and target price are suspended, formerly Buy and $1.39 respectively, because of research restrictions following the takeover offer.
Grays has reached agreement with its landlord whereby it can vary the terms of the current lease to allow for an early exit. The company anticipates a move to new premises by the end of the year with a reduction in current occupancy costs.
Moelis considers exiting the Lidcombe lease early is a positive catalyst as, even without a net $4.5m cash compensation, the removal of the onerous lease charge and reduction in rent could result in a $3m per annum saving.
FNArena’s database shows five Buy recommendations and one Hold (Citi) for EclipX. The consensus target is $4.29, suggesting 18.7% in upside from the last share price. The dividend yield on FY17 and FY18 in forecasts is 4.5% and 4.9% respectively.