By Jeff Sanford
Toronto, Ontario — December 19, 2017 — In this week’s Tuesday Ticker, an end-of-year message from the Bank of Canada, the investment arm of the Canada Pension Plan bids for a fleet management firm that manages accident claims, and much, much more!
The governor of the Bank of Canada, Stephen Poloz, held his end of year press conference. He suggested the bank is feeling confident that the economy will need less stimulus over the year ahead, and noted that at some point interest rates will have to rise further. Though, he seemed to suggest there is still too much slack in some areas of the economy for any aggressive rate raising. Some key quotes from his presentation:
- “… wages may be showing the early signs of picking up. …[but] they may only be going up in sectors that are tight, leaving lots of excess supply elsewhere in the labour market.”
- “Wages, despite the fact that they have up-ticked, are still well below their typical level at this stage of the business cycle, so we know there is slack underneath there.”
- “Our views haven’t changed. Things are progressing nicely, but we need to be cautious, not mechanical. Cautious is not a code word. It’s just like anybody driving in a snow storm. You need to drive a little slower and you watch all the signs along the way to make sure you stay on the road.”
- “We haven’t learned much so far. It’s quite early days… In our models raising interest rates takes pretty well a year for it to have a truly noticeable effect on the economy. And then it’ll take another, probably a year, certainly another couple of quarters, for the rest of the mechanism to work its way and for us to influence inflation.”
The governor is wise to take a measured approach to raising interest rates. Statistics Canada released a report last week noting that household debt in Canada rose to “… a fresh record in the third quarter, likely fuelling increased concern about consumers’ ability to handle higher rates.” At the same time, net worth on a per capita basis fell. According to Statistics Canada the ratio of household credit debt to personal disposable income climbed to 171.1 percent from 170.1 percent in the previous quarter. Households in Canada owe 1.71 Canadian dollars (US$1.33) for every dollar of after-tax income earned. Canadians have a large $2.11 trillion in debt outstanding. At the same time, after-tax income rose 0.8 percent in the third quarter. That’s lower than the rise in debt.
A Royal Bank of Canada economist suggests that households will “remain stuck with high-debt loads, keeping financial system vulnerabilities elevated in the years to come.” The average Canadian consumer will be sensitive to any rise in rates. Some expect that the large amount of debt will continue to weigh on Canadian economic activity. Consumer spending will not be as high as it would have been with less debt on the books of the average Canadian. Any increases to the interest rate will be slow and measured as a result.
Axalta
Axalta released financials this past week. During a conference call held to mark the release, management discussed the company’s prospects in the year ahead. “In our light vehicle end market, we would observe the global forecasts of production currently call for around 1.5 percent to 2 percent global automotive production growth, including modest growth in Asia-Pacific and EMEA, offset by slightly lower production rates in North America. Latin America is forecast to continue a recovery, albeit from a small base with limited impact to the global picture. For Axalta, we’re expecting modest market growth, based on company specific opportunities and global customer exposures that we expect to lead to low single-digit organic growth based on current market forecasts for 2018.”
The company’s management touched on the heavy truck market as well: “… in the commercial vehicle truck markets, they’re expected to continue to grow again, following a particularly strong year for orders, largely in North America. Axalta expects to maintain market share in this end market, while focusing on the opportunity to broaden our presence in under-served markets… For 2018, we expect mid single-digit organic growth. For our consolidated results, we see a reasonable balance of market drivers to support our forecast of moderate organic growth in 2018, including a stable foundation of volume from refinish, reflecting the stability of that end market… We see little demand inflection fundamentally in our served markets and would characterize the global demand environment for our business as stable and sound.”
Uni-Select
Shares of Uni-Select are currently enjoying an average rating of “buy” from the nine brokerages that are currently covering the company. Only one analyst has a “hold” recommendation on the stock (a rating that is still positive). The other seven analysts that follow the stock have “buy” ratings on the company. The average one-year price objective of the analysts is C$36.38. Early this week shares in Uni-Select were trading around $28.24.
AkzoNobel
The global game of musical chairs played among the world’s big paintmakers seems to have paused for a bit. That doesn’t mean the involved companies are sitting still. Major Dutch paint maker AkzoNobel has announced it had acquired a firm, Thai V.Powdertech, on November 27. The deal came just days after talks with Axalta broke down. AkzoNobel will acquire a manufacturing facility as well as patent and trademark rights. The company manufactures 8,500 tonnes of powder coatings each year and has automotive part suppliers among its customers.
Element Fleet Management
An interesting deal announced this past week involved the investment fund arm of the Canadian Pension Plan, the Canadian Pension Plan Investment Board (CCPIB). The Board is Canada’s largest pension fund. Last week it teamed up with the Toronto-based private equity fund owned by Gerry Schwartz, Onex Corp., to bid for an interesting Canadian company called Element Fleet Management. As the name suggests, Element is a major commercial vehicle leasing company. Shares in the company trade on the TSX under the banner EFN. It’s an interesting company that anyone in the Canadian collision repair space should be aware of. According to its website the company has grown rapidly since it bought up rivals PHH Arval and GE Capital’s fleet management business. Those companies were absorbed in 2014 and 2015. Now the company is growing as it takes over the hassles of managing fleets of vehicles for larger operators.
Among other services, Element offers fleet accident management. When a driver calls following an accident, a dedicated support team takes care of repair assistance, towing, interim rentals and repair shop assignments. According to the company, team members are I-CAR trained-and-certified collision adjusters. They review, negotiate and make recommendations on vehicle repairs to ensure vehicles are, “… getting the right repairs at the best price. The company will also coordinate receipt of documentation and photos, follow up on critical repair-cycle events to minimize vehicle downtime, communicate with the driver or local manager for key appointments and repair timeline status.” According to Element, the company inspects suppliers’ repair facilities and performs audits on repairs. The company boasts that its team of certified adjusters have on average twenty years of experience in the automotive repair industry. The company boasts the average vehicle downtime per accident was just 10.4 days.
Element also operates a website to handle real-time claim information and accident reporting. Just this past August the company announced the addition of new features to its app, including maintenance scheduling for windshield repair. According to a press release, the app sends glass cases to Firestone Complete Auto Care, Tires Plus and Safelite AutoGlass. According to the press release, “Fleet managers can pre-determine available facilities… In addition, Xcelerate for Drivers now features manufacturers’ alerts for potential open recalls on a driver’s assigned vehicle. These alerts appear in the Xcelerate for Drivers personalized to-do list for each driver, ensuring visibility to these critical action items.”
Most interesting, however, is an announcement that Element made just a couple weeks ago. Element signed a deal with a ride-sharing service that General Motors has started called Maven. According to the press release, “Launched in January 2016, Maven has evolved into one of the fastest-growing mobility brands in North America… Element also provides Maven accident services, from the first notice of loss to getting the vehicle back on the road.” Maven is similar to Uber and Lyft, though it seems to be a bit higher-end.
Julia Steyn, Vice President, General Motors Urban Mobility and Maven, is quoted in the press release as saying, “Maven’s growth as a dynamic mobility platform has been remarkable over the two years since we launched. Element is helping Maven ensure our members can be there for the moments that matter by ensuring our vehicles are well maintained,” she said. “Element is one of the world’s leading fleet management companies, and this experience makes them an ideal partner to support our customers as we continue to grow.” According to Kristi Webb, President and CEO of Element Fleet Management, North America, “Our analytics-driven services and hands-on fleet management strategies are designed to keep all fleets on the road, but are especially critical for the Maven brand as they work to bring cost-effective car-sharing to more cities. Personal mobility and car sharing are changing the way people and businesses engage with their communities and serve customers – and this demands that we adapt core fleet managing practices to a changing world. We are extremely pleased to work with Maven to make this happen.” This deal with Maven could be huge for Element. No wonder the CPPIB and Onex are interested in the company.
In other news, Element has recently acquired a 12.5 percent interest in Splend, an Australian based company that provides vehicles for on-demand rideshare and delivery services. The company has received an initial issuer rating of BBB+ with stable outlook for its debt offerings. The bid for Element from CPPIB and Onex comes after shares in the company have fallen about 25 percent over the last year to about $10 per share. Media reports suggest the bid group made up of Canada Pension Plan Investment Board and Onex are the “leading bidder at this stage of the sale process…” Shares in Element have fallen for most of the year, from over $14 to about $10. Which is when CPPIB and Onex announced their bid. In the hours after the bid was announced shares spiked 10 percent.
Auto-part shares
The stocks of Canadian auto-parts makers have been on a tear this year. Earlier in 2017 the shares in Magna and Linimar Corporation were rising. Many believed that business at the companies would be buoyed as the million cars lost to hurricanes this past summer were replaced. More recently, however, the share price in the auto parts makers has been dropping. The generally dismal news coming out of the NAFTA talks with the Trump White House is a new story now eclipsing the earlier good news about a bump in business from the hurricanes. Shares in Magna and Linimar Corporation had gained almost 25 percent over the last year. But the stocks are trending down again now.
