EclipX ((ECX)) has convinced brokers of its ability to grow its corporate fleet, equipment leasing and platforms such as Right2Drive and Grays eCommerce. The fleet business gained market share in the Australian commercial segment in FY17 and, having recently acquired Grays, the company has conducted a cost rationalisation program, quickly disposing of loss-making consumer categories. Wine logistics has been outsourced and the corporate entity integrated into EclipX.
An investor briefing outlined the company’s vision for leveraging core capabilities to offer customers the ability to purchase, finance, manage, renew and dispose of motor vehicles, as well as an accident replacement plan. EclipX also upgrades FY17 net profit guidance to the upper end of the $66.3-68.0m range.
There is significant opportunity from a low base to grow the accident replacement market through Right2Drive, Morgan Stanley attests, and via Grays to internalise the disposal of vehicles and grow the equipment financing book.
The company may be transforming into a diversified financial services business but Citi cites increased complexity and reduced visibility as the downside. The broker acknowledges the merit in owning multiple points across the customer chain, while envisaging FY18 will be a pivotal year for delivering on the Grays revenue synergies.
On the other hand, UBS suggests visibility is good, as around 70% of earnings are already generated from the current book. The broker expects organic growth will be driven by new business in fleet and calculates 21-23% growth from the upgraded guidance, including the contribution from Grays.
Growth should also come from equipment finance, Right2Drive and Grays. The main risk to the earnings profile, UBS contends, is any potential change to the Right2Drive operations as the industry matures.
Grays is the largest online auctioneer in Australia, selling over 100,000 assets per month. Management expects Grays to generate $23-25m in operating earnings (EBITDA) in FY18. The company specialises in the valuation and sale of industrial and commercial assets, plant and equipment. Its automotive marketplace auctioned around 30,000 vehicles in FY17 with a clearance rate of 87%.
Morgan Stanley believes the benefits of the company’s actions in aligning the Grays strategy will be realised this year and there is a significant opportunity to dispose of leased vehicle through the vehicle auction site, cross-sell products and drive organic growth in automotive auctions.
The equipment finance book can also be grown by leveraging relationships in the equipment auction business. Macquarie suggests part of the strategic appeal of Grays is the improving monetisation from end-of-term leased vehicles.
The company operates in a large market that benefits from growing awareness of vehicle replacement. Right2Drive branches are to be expanded over the next six months to over 40 from the current 30. Right2Drive is also on track to deliver its operating earnings at the top end of guidance of $12-14m. The national footprint is increasing and the company is diversifying its sources of business.
Right2Drive has a large market opportunity which management estimates is worth over $700m per annum, with less than 20% of consumers currently aware of their entitlement to vehicle replacement when they are not at fault in a motor vehicle accident.
Morgan Stanley is bullish about the opportunity and believes the accident replacement market is increasingly relevant based on experience in the UK. The market is expected to double in the next five years. The broker also envisages an opportunity to form a partnership with insurers as a catalyst for more growth.
Although Right2Drive makes up only 14% of FY17 earnings the broker believes it will contribute growth of 3-5% over FY18-20. Macquarie forecasts double-digit growth for Right2Drive in FY18, supported by the branch expansion and improved customer awareness.
The target on FNArena’s database is $4.42, suggesting 11.5% upside to the last share price. There are five Buy ratings and one Hold (Citi). The dividend yield on 2017 and 2018 forecasts is 4.0% and 4.5% respectively.