Google Finance
Filing
EFN Filing
Feb. 10, 2017
2016 Q3 Data
Current Price: $3.00
1. Basic Information
(1) History
The company is a spin-off from previously Element Financial in around the fall of 2016. The other part is called Element Fleet Management(EFN) and roughly accounts for 4/5 of the original business while ECN accounts for 1/5 of the original business.
Element Financial was IPO'ed in 2011 at around $4.20. After 5 years it grew its asset base from $400m to $24B mostly from acquisition and the share price tripled to $15/share before the split. Currently, Element Fleet is around $13/share and is better received by the market than ECN.
(2) Business related:
Element Financial has 4 segments, the main one is Fleet management which provide leasing to business for commercial vehicles. The fleet business now belongs to EFN. The main reason seems that since it is already the biggest in its industry, there is less room to grow. Also, it wants to focus on technology innovation like more smart fleet management or entering the auto-sharing market, etc.
What is left for ECN is the following 3:
1) Aviation: Providing financial or leasing for airplanes, currently has $1.1B in assets. 70% are in leasing. The company plans to phase out this business.
2) Rail: Rail car financing, currently around $2.3B in assets. Most assets are leased.
3) Commercial and Vendor: Provide finance for customers of big machines etc. Around $2.3B in assets, none are leased. Probably just financing. The majority are construction equipment($630m), Vehicles($560m), Restaurant equipment($200m), Healthcare($200m), Highway Trailers & Tractors($300m) etc. This is the sector that ECN plans to grow significantly.
Future:
Mid-Market Financing: as indicated in the company's presentation, this might be the market the company wants to pursue. It can generate around 5% pretax return of ROA.
(3) Management.
Steven Hudson is the key person in this company. Previously he founded Newcourt Credit 1984 in his 20's, the company was also doing equipment funding. He grew the company like crazy to $36B in assets until 1998 when its funding source commercial paper market dried up and the company got in trouble and sold to CIT for a fraction of its top price.
He went to Florida in the early 2000s and bought a hair-growing business called Hair Club for $25m, grew and sold it 3-4 years later for $210m. Then he came back to Canada and invested in Herbal Magic, a weight loss business, but was unsuccessful.
As the financial crisis hit in 2008, he saw the opportunity and reentered the equipment financing business. Element Financial was created by some of his old Newcourt people in 2007 Hudson joined it and took the lead. Element Financial was similar to Newcourt but more focused and less aggressive.
Bradley Nullmeyer is Hudson's long-term partner who co-founded Newcourt together and joined Element Financial as well. After the split of Element Fleet and ECN, Nullmeyer became CEO of the bigger Fleet company.
Oddly Hudson took the smaller ECN finance company, and 4 of his Element manager who is also from Newcourt followed him to the smaller company including the CFO. While none of the new management in the fleet business is from Newcourt. After the split, Hudson sold around $18m shares in Element Fleet and put those to ECN to make his holding on both even. I guess his share of both companies is around $20m.
(4) Debt and Credit Facility.
Total assets are around $6B. Total debt is around $4.3B. Total equity is $1.7B. The leverage ratio is 2.5:1.
(5) Insider holding, options, Insider trading info, share buyback.
(7) Auditor
(8) Industry comparison.
Most of the Commercial and Vendor loan seems to be done by banks.
(9) Major events
2. Financial data.
3. Valuation
Need more study of its finance, following is just a very rough idea of its profit. Might not actuate.
Its book value is around $4.42/share which is $1.7B in total equity. Total assets that generate interest is about $5.6B. It generates 2.4% to 3.3% before tax spread in income. Using a 3% medium rate and 25% tax rate, it generates $5.5B*3%*75%=$120m annual income. The current market cap is $1.2B which is just 10 P/E。
It is quite amazing to me that several people followed Hudson from Newcourt to Element and now to the small ECN. They will get lower compensation shortly. Obviously, they are looking to grow the business just like the previous two. This potential is probably the most valuable part of the business. Unfortunately, it is hard to put any value on it.
While some people criticized the split, I think the main reason behind it is quite reasonable. For one, Hudson is more humbled about himself and the company is getting too big for him. His best shot is to grow a new business while not running a big and stable one. The second reason is that after the split, the fleet business will get a better rating and be easier to understand. That is why the fleet stock is going higher after the split.
4. Risk
(1) When the interest rate goes up, its cost of borrowing will go up as well. Not quite sure whether they can pass that on to its customers.
(2) Hudson has learned a lesson from Newcourt, however, it is hard to say the past won't be repeated.
(3) It must rely on future acquisitions to grow its asset base or the business may shrink if it can't originate enough new loans to offset the aviation business.
(4) It is a small financial service, so it is always linked to the economic situation, if there is a financial crisis again, it will suffer.
5. Conclusion
The market seems to like the fleet company while disliking the smaller one. But I think the smaller one has way more potential than the bigger one. The price currently is quite cheap based on existing business alone. The future growth potential is like a free option now.
There is some risk that a typical finance company will have. The management team is highly dedicated and experienced. Investment in this company is mostly a bet on the management team. One needs some faith in Hudson and his people.
Steven Hudson is the key person in this company. Previously he founded Newcourt Credit 1984 in his 20's, the company was also doing equipment funding. He grew the company like crazy to $36B in assets until 1998 when its funding source commercial paper market dried up and the company got in trouble and sold to CIT for a fraction of its top price.
He went to Florida in the early 2000s and bought a hair-growing business called Hair Club for $25m, grew and sold it 3-4 years later for $210m. Then he came back to Canada and invested in Herbal Magic, a weight loss business, but was unsuccessful.
As the financial crisis hit in 2008, he saw the opportunity and reentered the equipment financing business. Element Financial was created by some of his old Newcourt people in 2007 Hudson joined it and took the lead. Element Financial was similar to Newcourt but more focused and less aggressive.
Bradley Nullmeyer is Hudson's long-term partner who co-founded Newcourt together and joined Element Financial as well. After the split of Element Fleet and ECN, Nullmeyer became CEO of the bigger Fleet company.
Oddly Hudson took the smaller ECN finance company, and 4 of his Element manager who is also from Newcourt followed him to the smaller company including the CFO. While none of the new management in the fleet business is from Newcourt. After the split, Hudson sold around $18m shares in Element Fleet and put those to ECN to make his holding on both even. I guess his share of both companies is around $20m.
(4) Debt and Credit Facility.
Total assets are around $6B. Total debt is around $4.3B. Total equity is $1.7B. The leverage ratio is 2.5:1.
(5) Insider holding, options, Insider trading info, share buyback.
(Nov. 2017)
Steven Hudson: 10m shares, 5m options. His compensation is around 2M for 2016, half of it is options. Based on his interview, he is more in favor of stock-based compensation than cash-based.
(6) Employee numbers
Around 200 employees which are just 1/10 of Element Fleet.Steven Hudson: 10m shares, 5m options. His compensation is around 2M for 2016, half of it is options. Based on his interview, he is more in favor of stock-based compensation than cash-based.
(6) Employee numbers
(7) Auditor
(8) Industry comparison.
Most of the Commercial and Vendor loan seems to be done by banks.
(9) Major events
3. Valuation
Need more study of its finance, following is just a very rough idea of its profit. Might not actuate.
Its book value is around $4.42/share which is $1.7B in total equity. Total assets that generate interest is about $5.6B. It generates 2.4% to 3.3% before tax spread in income. Using a 3% medium rate and 25% tax rate, it generates $5.5B*3%*75%=$120m annual income. The current market cap is $1.2B which is just 10 P/E。
It is quite amazing to me that several people followed Hudson from Newcourt to Element and now to the small ECN. They will get lower compensation shortly. Obviously, they are looking to grow the business just like the previous two. This potential is probably the most valuable part of the business. Unfortunately, it is hard to put any value on it.
While some people criticized the split, I think the main reason behind it is quite reasonable. For one, Hudson is more humbled about himself and the company is getting too big for him. His best shot is to grow a new business while not running a big and stable one. The second reason is that after the split, the fleet business will get a better rating and be easier to understand. That is why the fleet stock is going higher after the split.
4. Risk
(1) When the interest rate goes up, its cost of borrowing will go up as well. Not quite sure whether they can pass that on to its customers.
(2) Hudson has learned a lesson from Newcourt, however, it is hard to say the past won't be repeated.
(3) It must rely on future acquisitions to grow its asset base or the business may shrink if it can't originate enough new loans to offset the aviation business.
(4) It is a small financial service, so it is always linked to the economic situation, if there is a financial crisis again, it will suffer.
5. Conclusion
The market seems to like the fleet company while disliking the smaller one. But I think the smaller one has way more potential than the bigger one. The price currently is quite cheap based on existing business alone. The future growth potential is like a free option now.
There is some risk that a typical finance company will have. The management team is highly dedicated and experienced. Investment in this company is mostly a bet on the management team. One needs some faith in Hudson and his people.
6.Links
http://www.bnn.ca/csuite-interviews/video/element-financial-splits-into-two~955035
Feb. 21, 2017.
Current Price: $3.6
The company sold the U.S. C&V business for $1.25B, about $170m above its book value on the balance sheet. Probably will increase book value to around 30c to 40c per share.
August 16, 2017
Price: $3.93, market cap: $1.53B
(1) It sold $1.5m railcar assets and wind down the aviation fleet. Added the C&V sale. It is financial assets decreased from $6B to $4B. Will continue to drop in Q3 I think.
Links:
Preferred shares:
http://prefblog.com/?p=33957
http://www.bnn.ca/csuite-interviews/video/element-financial-splits-into-two~955035
Feb. 21, 2017.
Current Price: $3.6
The company sold the U.S. C&V business for $1.25B, about $170m above its book value on the balance sheet. Probably will increase book value to around 30c to 40c per share.
August 16, 2017
Price: $3.93, market cap: $1.53B
(1) It sold $1.5m railcar assets and wind down the aviation fleet. Added the C&V sale. It is financial assets decreased from $6B to $4B. Will continue to drop in Q3 I think.
Links:
Preferred shares:
http://prefblog.com/?p=33957
Update:
Dec. 13, 2022
Price: $2.66. Shares: 245m. Cap $650m
(1) My original thesis about the company was proven to be correct. It took quite a while for it to work out. Unfortunately, I missed the $7.5 special dividend.
(2) In August 2021, the company sold its Service Finance(Home Improvement Finance) business for $2B in cash. It was originally purchased by ECN in June 2017 for $300m in cash. At that time, it had around $1.35B in managed assets, quarterly origination of around $150m, and $7m in quarterly EBITDA. At the time of sale(Q2 2021), Service Finance's managed assets were $3.5B, origination was $650m and EBITDA was $25m. ECN distributed CAD$7.5/share to shareholders after the sale of Service Finance.
(3) In Q3 2022, it sold Kessler Financial (Credit Card Receivables) for around $210m. ECN originally invested $220m in May 2018 for 80% in equity interest of Kessler. In Q3 2018, it generated 33.4m in revenue and 21.4m in EBITDA. In Q2 2022, it generated 27m in revenue and 13m in EBITDA. It seems a failed investment in which the company didn't make any gains during the years. After the sale, ECN should pay down over $100m in debt.
(4) From 2017 to 2019, with share buyback and SIB(Tender offer), the company bought back around 160m shares at an average price of $3.85. This reduced its shares account from around 390m to 245m.
Current business segments:
Manufactured home financing: Triad Financial Services
It was acquired by ECN in Oct. 2017 for $100m. At that time, it had around $1.9B in managed assets, $130m in quarterly origination, and $3.6m in quarterly EBITDA. It is doing very well currently(Q3-22) with around $4B in managed assets, $380m in quarterly origination, and $27m in quarterly EBITDA.
Marine and RV Finance: Source One Financial Services & Intercoastal Financial Group:
Source One was bought in Dec. 2021 for 92m.
IFG was bought in Aug. 2022 for 55m.
Currently(Q3 22), it has $ in managed assets, $300m quarterly origination, and $5m quarterly EBITDA. It is very seasonal with Q2 and Q3 much better than Q1 and Q4.
Balance Sheet
By Q3 2022, it has around $1B in debt. The current interest rate is around 6% to 7%. It has around 683m in finance assets. Among these $365m is earning interest around 8%. Net debt 310m. After the sale of Kessler, the total debt will be around 800m. Net debt 120m.
Valuation:
(1) After the sale of Kessler, the company's tangible book value will be around 0. If we value the Marine & Recreational segment as $150m, then Triad should be worth at least 5x of that value which is around $750m. Together it should be worth around $900m. Using 250m shares, it should have a real value of $3.6/share. The current share price of CAD$2.7 has a 45% discount. If using the valuation based on the sale of Service Finance, Triad could be worth even more than $750m.
(2) On a profit basis, the company is expected to generate $0.25-$0.35/share profit in 2023 which doesn't include acquisitions. Give its P/E ratio less than 10 based on the current share price.
Risk:
(1) Both the MH, the Marine, and the RV business might all be subject to high interest rates or economic downturns. If the origination is down, it will affect ECN's business significantly.
(2) The debt will incur higher interest expenses than its interest income. However, it shouldn't be a big deficit.
(3) The company might not have the same liquidity as before to allocate capital effectively. I wish it hadn't paid such a big dividend.
(4) It might take a very long time for it to release its value in the future.
Overall, I feel the company is still excellent and the current price is very acceptable.
Update:
Dec. 4, 2023
Price: 2.5. Shares 280m(306). Cap $680m.($765m after conversion of preferred shares)
The past year proved to be a challenging year for the company. Especially in Q2 and Q3 2023, both the MH and the Marine&RV business are slowing down. Especially in the RV&Boat business, the origination dropped quite a bit. Also, the high-interest rate started to eat up its interest margin. From 2020 to Q3 2023, its floorplan interest rate rose from 9% to 11% while debt interest rose from 3% to 9%. The company went through a strategic review and took the following actions:
1) Skyline(one of its major partners) injected over USD138m(CAD185m) into the company for 33.6m common shares at CAD$3.05/share and 27.5m of 4% preferred shares that can be converted at any time by Skyline at the same price. The total shares outstanding will be around 306m after the full conversion. Skyline will own 20% of the company. After the cash investment, the company has a positive tangible book value of around $30m.
2) Skyline will enhance its relationship with the company which will provide $12m to $24m more income for the company in fiscal year 2024.
3) The company will sell or spin off the Marine&RV business in early 2024. It will also sell the Marine&RV floorplan loan business as well( around $140m in balance sheet).
Comments:
1) There is a flaw in last year's valuation. The EBITDA is not a good metric for evaluating the sub-business anymore. Mainly because of the high-interest rate, the EBT(Earning before tax) is much a better metric. In 2022, the Marine&RV business generated around $13.5m EBT while the MH business generated $68m EBT. If valuing the Marine&RV at $150m, then the MH business will be worth around $750m. However, it also has a $140m positive book value which should be added back to the business. Given the new Skyline partnership, it could boost the earnings starting in 2024. I think it is fair to evaluate it at $900m or above.
2) Currently, the corporate expense is around $3m/q. The company intends to cut around $6m/year. The interest expense is above $5m/q. I estimate it will drop to below $3m starting Q4 2023. If the company can sell the Marine&RV business successfully in 2024 for around $150m. The cash can eliminate its corporate debt in all.
3) I estimate MH generates $70m EBT, corporate consume $10m/year, and it can generate $50m in real income. Using 20 p/e, it can support around $1B market cap. The current cap $570(in USD) is still acceptable.
