Eclipx goes back to Pre-COVID-19 time, is it sustainable?

Summary

• Eclipx share price has surged 273% amid hitting a low price of A$0.4 on 23 March to settle at A$1.495 on 2 September.
• In its latest business update, the Group mentioned that it had dissociated itself from all its non-core businesses and is now solely focussed on developing its core fleet business.
• Eclipx has achieved its operating expense target on a run-rate basis and was targeting an annualised A$15 million reduction in its core fleet operating expense base from A$99.5 million in FY19 to A$84.5 million by the end of FY21.
• In August end, new business writings in corporate operating leasing were tracking at about 70% to 80% of average pre-COVID-19 levels reflecting desires of clients to seek lease extensions instead of renewals or new business writings.
• Last month, Eclipx sold its Right2Drive business to Growth Factor Group, satisfying all the closing conditions of the agreement.

Eclipx Group Limited (ASX:ECX) is a leader in providing vehicle leasing, fleet management and varied financial services in Australia and New Zealand. The Company assists clients and companies of all sizes access the funds required via fleet lease, vehicle sales, commercial equipment finance and motor vehicle financing solutions.

Eclipx shares have given a positive return of 273%, from hitting a low price of A$0.4 on 23 March to settle at A$1.495 on 2 September.

On 3 September 2020, Eclipx ended the day’s session at A$1.485, marginally decreasing by 0.669% from its last close.

On the same day, the Group provided a business update on its Simplification Plan just before its participation at Macquarie Group Emerging Leaders Forum.

Eclipx established that the Simplification Plan has been delivered with dissociation of all its non-core businesses, reduction in operating expenses and slashed corporate debt. Eclipx is now merely centred on improving the core fleet business and its strategy.

Some of the other highlights with respect to operating expenses, debt and liquidity of the Group are as follows:

• The Group was aiming towards an annualised A$15 million decrease in its core fleet operating expense base from A$99.5 million in FY19 to A$84.5 million by the end of FY21
• On a run-rate basis, Eclipx substantiated that the operating expense target has now been achieved
• Group gross corporate debt stood at A$170 million as at 31 August 2020, below the Company’s target of A$175 million
• There is substantial headroom as per the revised corporate debt agreements, which were additionally enhanced in May 2020
• Total Group liquidity stands at about A$180 million (as on 31 August), comprising of A$105 million in undrawn capacity under the corporate debt facility

New business writings for vehicle leases reaching pre-COVID-19 levels

New Business Writings in Corporate operating leasing persist to track at approximately 70% to 80% of the average pre-coronavirus levels (Oct’19 to Feb’20). This showed the wish of some clients to obtain lease extensions as a substitute for renewals or new business writings. Further, novated monthly volumes have been tracking more than 80% of the average pe-COVID-19 levels.

End of lease car sales have persisted in reflecting positive momentum since the middle of April 2020. End of lease income in the second half of 2020 has been anticipated to be about 90% of 1H20 end of lease income.

ALSO READ: Businesses getting rid of non-core assets: Car leasing player Eclipx dumps Right2Drive

Eclipx reported no rise in the overall cost of warehouse funding. The Group confirmed that it had secured credit approvals from all financiers to raise funding commitments for its warehousing programmes in Australia and NZ, conditional on finalisation of customary documentation.

Moody’s Investors Service that independently rates the Group’s warehouse structures in Australia and NZ has confirmed that there is no need to raise credit enhancement (equity) funding for all of the Group’s rated warehouse structures.

The pricing and credit enhancement levels have stayed consistent in a competitive macro environment. Hence, the Group’s warehouse renewals have shown favourably on the stable credit and asset quality of warehouse programmes, highlighting the long-term support given by its longstanding warehouse funders.

Sale of Right2Drive

Last month, on 6 August, Eclipx finalised the sale of Right2Drive, satisfying all the closing conditions associated with the sale.

• The Group entered into a binding agreement on 20 July to sell all its shares in Right2Drive to Growth Factor Group for a purchase price of up to A$26.5 million.

• The deal comprises of a fixed consideration of A$19.2 million, which includes A$15 million payable once the transaction concludes and A$4.2 million to be paid 18 months after conclusion
• Contingent payment of A$7.3 million was also included, which will be payable at 6-month intervals subsequent to conclusion for a period of up to 2 years, based on pre-agreed collection rates on the current Right2Drive debtor book
• The carrying value of Right2Drive stood at A$28 million as at 31 March 2020
• The deal entails a continuing commercial association with Right2Drive, involving a right to provide Right2Drive with new vehicle leases for a term of three years, whereas all current leases between Eclipx and Right2Drive would still stay on foot
• All net proceeds from the sale are planned to be applied to the decline in Eclipx’s corporate debt facilities