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Is Eclipx Group Ltd (ASX:ECX) a bargain, or best avoided?

Shares in diversified financial services organisation Eclipx Group Ltd (ASX: ECX) are up 3.1% to $2.45 at the time of writing – a welcome surge for the company after a series of declines.

As at 31 March 2018, Eclipx managed or financed more than 112,000 vehicles with $2.3 billion in assets under management.

It operates in Australia and New Zealand under nine primary brand names, FleetPartners, FleetPlus, CarLoans.com.au, Georgie, areyouselling.com.au, FleetChoice, AutoSelect, Right2Drive and GraysOnline.

Shares in the fleet management company got slammed by around 43% in early August after the company revealed revised NPATA guidance.

Eclipx expects to report FY18 NPATA of between $77 million and $80 million – up between 13% and 17% on FY17, but a downgrade from previous expectations of between 27% and 30% growth.

Its preliminary report is due out in November with its annual report in December.

The revised guidance is related to insolvency auction volumes being at decade lows, with Eclipx seeking opportunities in the underpenetrated accident replacement vehicle market to realign its strategy.

But Eclipx disappointed many by rejecting a non-binding takeover proposal from SG Fleet in late August after SG Fleet moved to acquire all shares in Eclipx by way of a scheme of arrangement – valuing the shares at $2.52 – which was a premium of 17.8% to Eclipx’s share price at the time.

The Eclipx board rejected the offer on the basis the offer price did not “reflect the long-term value” of the group, its underlying assets, growth prospects and operating leverage.

If you take the view Eclipx has the product offering and strategic merits to up its performance in the short to medium term, the current share price would seem like a bargain.

The Board has indicated it is reviewing its structure with a view to “unlocking value for shareholders” – including consolidating the leadership of its Australian fleet business and the appointment of a Chief Operating Officer at Right2Drive.

But if you don’t feel confident the company can outperform despite its intent to change, it’s unlikely you’ll see much value in the current share price.

The latter will likely be the view of investors concerned about Eclipx’s issues with GraysOnline, despite only acquiring the business a year ago.

The fleet management space is a competitive one, with McMillan Shakespeare Limited (ASX: MMS) hitting all-time highs early this month before slipping back down to sit at $17.03 at the time of writing – but its peak price is not deterring buyers attracted to the company on its solid FY18 results.

McMillan managed to increase revenue by 4.2% in FY18 with underlying NPAT growth of 7.2%.

Elsewhere in the space Smartgroup Corporation Ltd (ASX: SIQ) shares recovered from a short dip in the last week after its CEO increased his shareholding by almost 9000 shares through an on-market trade.

Smartgroup reported NPATA of $38.5 million for the six months ended June 30, 2018, a rise of 27% on the previous corresponding period with revenue at $122.6 million – up 26%.

Foolish Takeaway

I’d put my bets on McMillan Shakespeare or Smartgroup Corporation in this segment before I bought into Eclipx given the state of play, but admittedly, you’re not going to get bargain basement prices out of the former as you will with the latter. However, cheap shares are only good if there are definitive growth prospects, and I’m not convinced Eclipx can promise that just yet.

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Motley Fool contributor Carin Pickworth has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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