Too much conjecture being thrown around here specially on the other threads and it is obvious that most are not familiar with the leasing business. I know it is asinine to do it in a forum but hopefully this post goes in a way to explaining the business model. Just a bit of background before I start. I currently own and run a tech firm and we have a substantial computing equipment (Operating lease) and fleet of cars leased (Novated lease). My company included, most tech and financial firms that I know of get their Novated Lease done through MQG mostly higher end vehicles BMW, Merc, Range Rovers etc. My company gets our IT Equipment leases via Eclipx Commercial. What Fleet/asset it is, is kind of important because of the depreciation value but I'll get to that is a sec. Also as some have pointed here ECX niche is in Operating lease. Regardless of Operating or Novated lease, the leasing business model and financing would be similar. Leasing involves 2-3 parties, the leasing company ECX, the company that requires the fleet/Commercial Asset (my company) and/or the individual in the company that the lease is attached too (my employee).
No doubt about it, it is a sweet deal for ECX. What ECX does is underwrite the lease agreement. Get a bunch of money from a source, usually FUM at a certain promised return or a bank at a certain interest. When my company enters into a lease agreement for say a few dozen high end computers and software, they will take the money from the source and puts my company on the hook for say 2 years worth of monthly repayments (M) with a substantial residual amount (R) due at the end of the lease. ECX makes money through M (comprised of monthly ECX profit, returns to the FUM or interest to the bank however the agreement was financed) but the real money is in R which my company is on the hook for on Novated Leases. On my company’s Operating leases, Eclipx Commercial has structured the lease with the residual value (R) staying on Eclipx's balance sheet not my company. This means I can return the equipment to Eclipx at the end of the lease. At the end of the lease I can choose to upgrade or walk away. Eclipx on the other hand needs to Auction off those few dozen computers to get the residual.
This is the reason why the debt is not an issue...most leasing companies like ECX have a lot of debt in the balance sheet but in truth it is not ECX that is on the hook for these liabilities. It's the companies that took on the leasing agreement. Not only that, these are backed by tangible assets with known depreciation value over time. In short the amount of debt is not an issue as long as ECX customers can pay the monthly and residuals on Novated leases...for Operating leases, customers pay the monthly and for ECX to cover the residual when it sells these equipment via auction. The real benefit for my company on the other hand is the low up front cost... I've crunched these numbers on my company Operating lease and IMO the residual at the end of the Operating leases for these computers is basically Zero. i.e. they made almost all of the money on the monthly. ECX selling these computers on GraysOnline is just the cherry on the cake and by no means the cake in itself. But what is a cake without a cherry on top... not a -55% discount to the fair value IMO.
For novated leases this is where the type of car is important. The residual amount is based on the depreciation of the vehicle over time. i.e. higher end vehicles usually hold up in price better and hence a larger residual is due At the end of the lease my company or employee pays ECX the residual then brings the car back to the dealer to get sold and any positive difference between the residual paid to ECX and the sale price of the vehicle; my company or my employee pockets. If difference between the residual and the sale price of the vehicle is negative then my company or my employee takes to the loss not ECX.
Now here is why the NPATA is not an issue. Also note that I'm focused more on the Operating lease as this is where ECX has the most exposure. If the announcement is accurate and most of the residual (R) that are due this year end up being extended instead. Then what happens in that situation is that my company opts to re-lease the same Computers instead of upgrading. We go into another agreement with another bunch of monthly repayments say this time its 1 year worth and at the end of that 1 year the residual is still due... Can you see whats happened in that scenario? The residual amount ECX won't get this year but will still get it in the future once extended lease agreement ends. The payments for R did not get encumbered it is merely delayed but in the meantime while the delay is happening ECX will profit from the monthly repayments. Unless of course my company goes belly up and can no longer pay the monthly but in such a case then it is a repo situation instead and ECX will get money from an Auction sale of the Operating asset repossessed and most of the time ECX actually make money on that too because of the substantial residual. Where ECX truly loses money is when my company goes belly up and the repo’ d computers won't sell at auction or sold at less than what the residual due is. ECX can mitigate this by underwriting the Operating leases to good business' only.
For impact due to Right2Drive & Grays then we have glimpse of it in page 39 of the annual report mostly restructuring and integration issues. These things will always take time... Done it many times in my business and it is a stressful period for everyone involved. I would say shareholders are the least of my worries while doing this in a section of the business. ECX can always sell these off if they cannot be restructured and integrated in the current business. I've done the same to the Graphic design part of my firm... to artsy and subjective; the definition of a job done is just too much of a grey area. I can see real synergies with GraysOnline i.e. a good dumping point for ECX end of Operating lease assets and recover the residual. Right2Drive on the other hand, no and If I was on the board will be thinking deeply on how to offload Right2Drive. Right2Drive was an ill time top of the cycle M&A and I agree with the market that this was a bad move.
Am I still in on this trade...damn straight I'm. I have been waiting for an opportunity in this sector for a year now and only because I know and understand the business model. If I did not then I would be running away from ECX with those massive falls. Is the Right2Drive fiasco enough to sink this company? I don't think so. Right2Drive definitely belongs to one of the larger insurance companies instead. ECX business is cyclical and most should treat her as such. There are hints of a structural issue in there but not enough to tell me she is going to Zero. Yes the big boys are dumping but only because they can't afford to post bad performance. For more nimble retail players that are not on margin then this is an opportunity not to be missed. Mispricing on ECX is just too good PE 3.3, PEG 0.4 & PB 0.4...probably less after today. Happy to hold and average down at this point until next quarter ann regarding Right2Drive structural fix.
To the more risk averse that can't stomach seeing red and/or on margin, I suggest the sidelines. Let the alligator investors like me take the first bite as we love biting when there is fresh blood on the market.
