Current Price – $3.56
Tender Price – $3.90 (Intrinsic Value – $5.6)
Upside – 10%-55%
Expiration Date – TBD
No proration for odd lot holders
All figures in Canadian dollars.
ECN Capital announced intention to launch dutch tender offer in order to purchase c. 8% of the outstanding stock. There is also odd lot provision which would result in $34 return if the offer is priced at the upper limit – and I think upper limit pricing is very likely in this case (few arguments below).
However, I find ECN Capital interesting form a longer term holding perspective. Currently I am still in the research process, but a few bullets on why I like the situation so far:
- ECN Capital is specialty financing and loan servicing company. It operates in areas of Home Improvement Finance, Manufactured Housing Finance, Rail Finance and Aviation Finance.
- The company was spun-off from Element Fleet Management in Oct 2016. Most interestingly Element’s founder and CEO Steve Hudson has moved to ECN after the spin-off. His story of building Element from start-up to $5bn company in a few years is fascinating. As this article puts it:
“Element Financial has emerged as a darling of institutional investors. In just five years, through a rapid series of financings and acquisitions, it has emerged out of nowhere to become a $5 billion financial services company and one of the largest vehicle fleet operators in the world.”
- 2017 has been a transformational year for ECN. Besides being spun-out from Element, the newly established company has completely revamped it’s portfolio through 5 strategic asset sales and two acquisitions (see slide 10). Basically out of the four current divisions two (Home Improvement and Manufactured Housing) have been newly acquired, 65% of Rail assets have been sold down and Aviation division is in wind-down mode. Company is transitioning from balance sheet lender towards manager of the assets/loans. And going forward its main exposure will be to US housing cycle.
- Hudson is using similar growth-through-acquisitions playbook that he has already successfully implemented with Element.
- ECNs performance during 2017 (which is the only reference year available so far) is not indicative of its true earnings power due to ongoing restructurings as well as fully revamped asset portfolio. 2018 guidance is EPS of $0.22. (see slide 22).
- Management calculates intrinsic value at $5.61/share which is comprised of earnings from Manufactured Housing and Home Improvement divisions at 12x multiple ($2.4/share in total) and book value per share of the remaining businesses ($3.21/share total). See slide 23 for details.
- Insiders own 11% of stock and keep on buying at prices higher than the current one. Insiders will not participate in the tender offer. (see slide 14)
- Company already bought back 7% of the outstanding shares since July 2017 through normal course issuer bid at average price of $3.8. Another 10m shares (c. 3% of all outstanding) remain under this buyback authorization.
- Counting previous buyback, remaining buyback authorization and the intended tender, company will have purchased 17.5% of outstanding shares since 3Q 2017.
I like the setup here – experienced jockey with a proven track record and proven growth-through-acquisition playbook, has left a far larger entity he himself built in order to start launch a smaller spin-off. In one year since the spin-off portfolio has been completely revamped through disposals and acquisitions, so things are moving very fast. Management values the company at 55% premium to current prices and both company and insiders are actively buying stock below the intrinsic value.
I still have very limited understanding about the business and prospects of each of the division, so take my thoughts with a grain of salt and do your own due diligence. But it looks like there is a reasonable margin of safety at buying ECN at current prices and strong potential upside if CEO executes as well as he has done with the previous company.
Very interested in hearing other opinions.