E Automotive is still a pass, says Eight Capital

Eight Capital analyst Christian Sgro is staying on the sidelines with E Automotive (E Automotive Stock Quote, Charts, News, Analysts, Financials TSX:EINC) after a new acquisition by the online auto auction and marketplace platform. Sgro delivered an update to clients on Thursday where he reiterated a “Neutral” rating on EINC along with a 12-month target of $8.00.

Toronto-based E Automotive and its sub-brand auction platform EBlock announced on Thursday a definitive agreement to acquire Houston Auto Auction (HAA) for US$5.5 million. HAA is a family-owned physical auction site that has been in business since 1964 and specializes in fleet sales for larger commercial partners like government and banks. The deal will see E Auto pay US$2.5 million on closing and paying the balance over two years, with an expected closing date of February 1, 2023.

E Auto said Houston Auto Auction transacted 6,500 vehicles in 2022, which compares to EINC’s own 195K transacted volumes over the 12 months ended September, 2022.

“The acquisition of Houston Auto Auction represents our first asset in Texas, the second largest vehicle resale market in the U.S. This acquisition, together with our Louisiana asset, ties together two strategic local markets in the Gulf State region as we continue to build scale and strengthen our footprint in the area,” said Jason McClenahan, President and CEO of E INC, in a press release. 

“Houston Auto Auction’s focus on commercial sales opens new opportunities for us to service commercial fleet customers. At the same time, we believe our technology, experience and capabilities with the dealer market can grow their market share,” he said.

Sgro estimated the impact of the deal as being “slightly positive” for EINC, noting the synergistic value of Houston Auto. At the same time, he noted E Inc’s M&A update in the same press release which stated that the company would no longer pursue a larger set of acquisitions that including Houston Auto were expected to total $85 million, with the company citing macroeconomic pressures on the auto market.

“We view the update as positive, signalling a more measured path forward and balance sheet discipline, all while adding a strategic asset operationally and geographically,” Sgro wrote.

“We think the acquisition adds value geographically, expanding EINC’s presence across the Gulf State region. HAA offers transportation services which will support EINC’s logistics capabilities in the US,” he said.

On EINC’s valuation, Sgro said the stock currently trades at 1.1x consensus 2023 EV/Revenue, with his target price of $8.00 based on 1.5x and key digital auto wholesale used car auction peers currently trading at 2.1x. At press time, Sgro’s $8.00 target represented a projected one-year return of 70 per cent.