Eight Capital analyst Christian Sgro is ready to take E Automotive Inc (E Automotive Stock Quote, Chart, News TSX:EINC) for a spin, initiating coverage on December 7 with a “Buy” rating and target price of C$28/share for a potential return of 70 per cent.
Founded in 2017 and headquartered in Toronto, E Automotive provides automotive dealers with access to online wholesale auction marketplace and subscription solutions to support digital retailing and management, operating under the brands of EBlock, where dealerships are given access to an online auction that simulates the urgency of a live auction, and EDealer, a recurring subscription offering where dealers can track and showcase inventory to consumers, ultimately facilitating the sale of new and used vehicles.
“EINC is building the first end-to-end online platform that serves the full dealer value chain, spanning the wholesale purchase/sale of vehicles to consumer-facing digital solutions,” Sgro said. “We believe that EINC’s potential to achieve 40 per cent organic growth, augmented by an M&A strategy that is not included in our estimates, will scale EINC into our target multiple.”
Sgro points to E Automotive’s opportunity in the North American used car market where only 36 per cent of dealers buy cars online. Eight Capital estimates there are roughly 310 million cars on the roads in North America, with 16 million new cars cycling in annually and 13 million cars phasing out.
Per the 2020 NIADA Used Car Industry Report, 73 per cent of used vehicles in the United States are sold through dealerships, with the remainder sold on a consumer-to-consumer basis.
All told, between EBlock and EDealer, Sgro estimates E Automotive having a total addressable market as big as $13 billion.
In his investment thesis, Sgro points to a number of key factors fuelling E Automotive’s market potential, chief among them the shift toward online platforms driven largely by the COVID-19 pandemic.
“EINC’s revenue model is torqued to an increase in wholesale auction volumes that are steadily shifting online from offline,” Sgro said. “The traditional, in-person format is ridden with inefficiencies for dealers, including travel time and costs. We think online formats increase accuracy of information, enhance price discovery, and reduce operational friction.”
In addition, Sgro notes E Automotive’s place as an established online platform set to take a sizable market share within the growing marketplace, particularly ahead of its planned expansion in the United States after the company raised C$135.7 million to fund its efforts in an initial public offering.
“With the US market estimated to be 10x the size of Canada, the company plans to scale nationwide within the next 18-24 months from a beachhead currently in the West,” Sgro said. “The US market has an estimated 340 wholesale auction providers, which we expect to serve as acquisition targets for EINC as the company builds out its infrastructure region by region.”
Finally, Sgro notes the company has a proven board and leadership team, including previous experience at key competitors KAR and Cox, as well as having strong backing from controlling investor Intercap, which was involved in the $1.1 billion sale of Dealer.com.
“Effective inventory management is a critical element of auto dealership profitability. Our platform, which offers an online wholesale auction marketplace where dealerships can purchase or sell vehicles, as well as access innovative software solutions, empowers dealerships to operate more efficiently,” said Jason McClenahan, President and CEO of E INC in the company’s November 12 press release. “Our market leadership in Canada, established scale in the western U.S., as well as the capital from the IPO put us in a great position to aggressively expand across the United States and fuel continued organic growth as dealerships increasingly adopt technology to drive performance.”
Sgro’s financial projections for the company indicate a call to action, as he projects $74.6 million in revenue for 2021 (all report figures in US dollars except where noted otherwise) for a 131 per cent year-over-year increase, followed by a projected jump to $98 million in 2022 (31 per cent year-over-year growth) before breaking into nine figures at a projection of $135.9 million for 2023, a 39 per cent year-over-year increase.
With regards to valuation, Sgro projects the company’s EV/Revenue to drop from an estimated 6.3x in 2021 to 4.8x in 2022, then falling again to a projected 3.5x in 2023. In terms of a comparable company from a valuation standpoint, Sgro pointed to ACV Auctions.
“Our target multiple, currently a premium to ACV at 5.0x, rewards EINC for its vision to drive outsized growth across the US,” Sgro said.
Meanwhile, on account of heightened investment, Sgro projects adjusted EBITDA losses of $6.6 million in 2021, $14.5 million in 2022, and $17 million in 2023.
Since it began trading on the Toronto Stock Exchange on November 3, E Automotive’s share price has dropped by 22.2 per cent. However, Sgro attributes the weakness to challenged growth equity valuations and light liquidity, creating the potential for a snap-back as the market opportunity comes more clearly into focus.
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