The Eclipx Group Ltd (ASX: ECX) share price surged on a relief rally even as UBS slashed the price target on the vehicle leasing and management company by nearly 80%.
The ECX share price responded by surging 16.4% today to 74.5 cents to become the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index with the Afterpay Touch Group Ltd (ASX: APT) share price and Bega Cheese Ltd (ASX: BGA) share price a distant second and third with gains of around 6% each.
The outperformance of Eclipx comes as investors are relieved that UBS hasn't changed its "buy" recommendation on the stock even as it downgraded its price target to $1 from $4.25 a share.
What's eating Eclipx
That's a big bite out of the target price but at least its still comfortably ahead of ECX's current share price even following the surge.
The value of Eclipx's share price has collapsed by around 60% in the last two weeks following its profit warning and the release of its restructuring plan.
Management said that its NPATA (net profit after tax but before amortisation) for the first five months of the current financial year was down 42.4% compared to the same time last year and FY19 NPATA will be around the same level as last year.
The key reason for the dour profit outlook has been the underperformance of its Grays Industrial and Insolvency business and Right2Drive (R2D) business. Both businesses are being put up for sale and Eclipx has indicated that several parties are sniffing around.
Is the stock cheap?
"Our detailed balance sheet and valuation analysis indicates material upside potential from current levels, but balance sheet stresses (potential corporate debt covenant breaches) need to be addressed," said UBS.
"Addressing these issues through the sale of Grays and R2D would likely be the most favourable outcome (i.e. a $50m+ sale would address balance sheet issues and see the core business trading on a pro forma FY19E PE of ≤4x).
If Eclipx's balance sheet can stand up to scrutiny, there's little doubt in UBS's mind that the stock is bargain-basement cheap as its trading on a forecast FY19 price earnings (P/E) multiple of 4.6 times. If you remove Grays and R2D, the P/E drops to just 3.8 times, added the broker.
The P/E has probably moved up a little given the big bounce in its share price on Monday but it's still probably among the cheapest on a P/E basis of stocks trading in the ASX 200.
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