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Leasing and Speciality Finance Companies Part II: Element Fleet Management Case Study

Element Fleet Management Primer (TSE: EFN)

Element Fleet is the largest publicly traded fleet management company in North America. Element Fleet also has operations in Australia, Mexico and New Zealand.

The company primarily provides vehicle leasing along with a range of other services such as vehicle financing, program management, analytics and remarketing of fleet vehicles.

With a market capitalization (as of September 10 2018) of $2,640M, Element Fleet has 1 million+ vehicles under management, 2,800+ customers and is serving over 50 countries through the Element-Arval Global Alliance which has more than 3 million fleet vehicles under management.

Additionally, Element Fleet is a stand-alone, “pure-play” fleet management company which focuses on Fleet Management on a global platform. The types of vehicles leased out by Element Fleet are Light-duty truck, Car, Medium-duty truck, Heavy-duty truck, Trailer, Equipment and Forklift, with Light-duty truck taking up the largest portion with 65%.

Element Fleet Management is in the process of assessing its core business across three work streams: core Element fleet business, 19th Capital Group LLC joint venture, and a comprehensive review of its balance sheet.

As for Core Fleet business, potential savings of $40 – $50mm is expected, which aligns with the company’s synergy targets, and as the result of cost synergies arising from Arval’s acquisition of GE Fleet Services Europe. The results of the strategic assessment and the resulting plans will be communicated in the early fall of 2018. Moreover, Element Fleet recently invested $100mm into technology and is expected to drive future operating leverage.

The new CEO Jay Forbes has a history of cleaning up broken stories and selling assets in a short period of time. Analysts’ take on the new initiatives by Element Fleet is that management will decide to liquidate 19th Capital, which is thought to be the cleanest way to minimizing balance sheet risk and restoring the valuation multiple.

This anticipation is based on limited strategic overlap with the core fleet business and operational risk associated with turning around business. Lastly, dividend has been cut in half from $0.3 as of December 2017 to $0.15 in 2018. Cutting dividend in order to de-lever should be viewed as a value enhancing decision.

Leasing and Fleet Management Industry Overview

Fleet management includes a variety of functions including vehicle financing, vehicle maintenance, fuel management, and accidents. Fleet management companies help businesses that rely much on their transportation by partially removing the risks associated with vehicle investments.

With fleet management companies, businesses can improve efficiency and productivity by lowering transportation and staff costs. The fleet vehicle is a critical tool for enabling a corporation’s revenue generating activities.

There are two ways to measure the size of the fleet market: new vehicle registrations for business purposes annually and the total number of fleet and commercial vehicles that are currently in operation for business purposes. The global fleet management industry is valued at roughly $8bn and is expected to reach $34bn by 2022.

Fleet/Leasing Market Segmentation

The fleet markets are usually divided into three major segments: Rental, Government and Commercial Fleet. Our company, Element Fleet, currently manages fleets in the commercial space. For each segment, you can break down the composition of the vehicles by their type, ranging from passenger cars to light trucks to heavy trucks.

  • Demand drivers. Demand is driven by business and leisure travel, as well as by the housing market. The profitability of individual companies depends on efficient operations and the ability to finance inventory. Big companies have economies of scale in acquiring vehicles and customers. Small companies can compete effectively by providing better service, alternative products, or lower prices. The US industry is highly concentrated: the 50 largest companies generate more than 80% of revenue.
  • Supply drivers. Supply is primarily driven by the growth of the economy. Developing countries are expected to heavily invest in their infrastructure as its economy grows, and as new corporates and governments enter this market, this sector is poised to growth at a remarkable rate. In the next ten years, advancement in technologies will bring many opportunities for technology focused corporations. On top of that, governments’ compliance requirements can potentially spur growth, with a number of governments requiring GPS (Global Positioning System) and ELD (Electronic Logging Device) in the consumer sector.
  • The latest trends in fleet management include the advent of self-driving vehicles, advanced GPS trackers that not only inform drivers of their whereabouts, but also driver’s driving habits. The advent of self-driving vehicles is expected to shift the industry from personal vehicle ownership to “user-ship” and that self-driving vehicles within car-sharing fleets to exceed traditionally-owned vehicles in a decade. Also, connected vehicles are continuing to develop, and the growing user data from vehicles are allowing fleet management companies to come up with meaningful benchmarks, and best practices to lower the cost of operating the customers’ fleets. In the United States, Electronic Logging Device is becoming prevalent as The Federal Motor Carrier Safety Administration (FMCSA) mandates these rules for commercial vehicles for safety of fleet and drivers. This device is attached to a commercial vehicle engine to gather the data about driving hours. Because of the implementation of ELD, adoption of fleet management software has significantly increased
  • Competition: Element Fleet has a leading market position in the U.S., Canada, New Zealand and Mexico, and its main competitors include ECX, ALD, Arval, LeasePlan and SGF.

Element Fleet Management Peer Analysis

In the last decade, there has been a lot of M&A activity in the North American fleet market, and the result was that the entire industry became dominated by five major players: Element, ARI, Enterprise Fleet Management, LeasePlan and Wheels, which took up more than 90% of the market.

As of the end of 2016, Element had the biggest fleet size with more than 1.5M vehicles in North America. Following that, ARI was ranked the second with around 1.0M fleet size with geographical focus on Canada and the U.S. The remaining players including Enterprise Fleet Management, Lease Plan and Wheels primarily focused on the U.S. market with less than the size of less than 500k.

In terms of trading multiples, Element Fleet (Core Fleet Business) is expected to have a P/E multiple of around 9.4x at the end of year 2018, which is significantly lower than the consensus estimates for U.S. Fleet Service Companies’ multiple of 18.8x. In addition, P/BV multiple for Element Fleet for the year 2018 is expected to hover around 0.8x, in line with the previous year’s number.

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Brian is a fourth year student studying actuarial science at the University of Waterloo. He was an analyst (Co-op) at OMERS Capital Markets in the Insurance Investment Strategy Group. Prior to that, he interned at Mercer as a summer analyst in the Financial Strategy Group. Outside of school and work, Brian enjoys playing squash and soccer.

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