Company Overview: SG Fleet Group Limited (ASX: SGF) caters for Australia, New Zealand, and the United Kingdom market by offering fleet management solutions like vehicle leasing, vehicles fleet management, consumer vehicle finance, short-term hire and salary packaging services.

SGF Details

Geographical and Product Mix Enhancing Revenue: The company holds a powerful workforce of ~700 people worldwide (operations in the UK, NZ and Australia) through products Fleetintelligence, Bookingintelligence, Electronic Logbook, Inspect365, eStart, REVS, Carsharing, Safety solution and Fleetcoach.

Glancing at 1QFY22:

1QFY22 Market Updates (Source: Analysis by Kalkine Group)

FY21 Top & Bottom Line:

Despite supply chain disruptions due to COVID-19 and pending orders pipeline, the company still managed to report significant performance during the FY21:

• Income Front: Gross revenue for the group was up by ~6.4% Y-o-Y and reported as ~$482.1 million for FY21. The reasons behind the rise are (a) new vehicles orders were up by ~25%, (b) growth in the “end of lease” income, and (c) greater penetration of the new products and services increased the revenue per order.
• Profitability: The company reported a ~27.3% Y-o-Y increase in Operating EBITDA, and thereby, its underlying NPAT was up by ~41.8% Y-o-Y. The same was stated as ~$51.6 million in FY21 versus ~$36.4 million in FY20. Due to the reduction in novated leases, disruption in the new vehicle supply chain (still ~8.6% increase), the overall fleet size was reduced by ~3% in FY21.
• Dividend: A fully franked final dividend of ~5.393 cents per share was provided to its shareholders.
• Balance Sheet Items: SGF ended its accounts of FY21 with the net corporate debt of negative ~$96.3 million versus negative ~$26.1 million. The cash and cash equivalents as of 31^st June 2021 stood at ~$231.1 million versus ~$111.1 million as of 31^st June 2020.

LeasePlan Synergies: The acquisition of ~$8.99 million – LeasePlan is expected to be completed in between the third and early fourth quarter of FY21.

• Scale-up: Using common resources like credit, HR, IT teams, and consolidation of business development teams, the company aims to drive improved customer interaction, thereby enhancing the operational scale and efficiencies.
• Customers’ Cross-Pollination: To best utilise the strengths of the respective customers base, SGF is maintaining the retention of additional customers by introducing LeasePlan safety products to SGF (NZ) customers, and on the other hand, LeasePlan customers trialling Fleetintelligence/Bookingintelligence.
• Book Optimization: Besides operational synergies, the company also focuses on a new securitization program after completion of the first securitization distribution.

Top 10 Shareholders: The top 10 shareholders together form around 76.43% of the total shareholding, while the top 3 constitute the maximum holding. Bluefin Investments Ltd. and Gunning (Tex) are holding a maximum stake in the company at ~52.29% and ~13.04%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company has reported an improvement in net margin performance from last year at 8.0% to 9.0% in FY21. Cash Balance enhances the company’s liquidity from ~$83.00 million in FY20 to ~$202.40 million in FY21.

Liquidity Profile & Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors and their mitigations:

1. Supply Chains and Issues in Delivery: The company is facing supply chain constraints, therefore unable to deliver and match the growing and pending demands from the order pipeline. This is stating the lead period of 12 months in new vehicles.
2. Fluctuations in Demands and Sentiments: Due to the changes in customers’ preferences and sentiments, SGF’s 1HFY21 got affected in its novated leases segments. Although, the company uses its product and geographical mix to offset the same.
3. Technology Risk: The business’ efficiency is dependent on the ease its interface and technology provided to the customers, failure in regular upgradation to which might affect the shift in usage and customer retention.
4. COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company can get impacted by the lockdown regulations, which might affect its sales.

Outlook: With the positive outlook in restrictions easing out, the company expects:

• Second-hand values to normalize, whereas supply chain constraints will persist for some time in the near future (1HFY22).
• Fulfill its pending order pipeline, which almost doubled in FY21. This will allow a significant no. of spill in the orders for FY22.
• Further recovery in UK, NZ and with the aim of penetration of new products in corporate and novated business in AUS market.
• As stated above, SGF is quite positive as it will touch upon the completion of the LeasePlan acquisition (Inorganic Growth) and expects accrual of common business profits. While, on the other hand, the company doesn’t shy away from its prime focus on the retention of the existing customers (Organic Growth).

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of SGF is trading below its 52-weeks’ average levels of $2.21-$3.29. The stock gave a negative return of ~21.57% in the past six months and a negative return of ~20.48% in the past nine months. The stock has been valued using EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at some discount to its peers’ average multiple, considering the headwinds caused by Omicron COVID-19, supply chain constraints, and gap between efficient application of LeasePlan synergies. For the purpose of valuation, few peers like Mader Group Ltd (ASX: MAD), Brambles Ltd (ASX: BXB), AMA Group Ltd (ASX: AMA) and others have been considered. Considering the expected LeasePlan synergy, upside potential in valuation, current trading levels, SGF’s customers’ expansion and retention strategy through product diversification, hopeful long-term outlook, geographical and product mix, and the key risks associated with the business, we recommend a ‘Buy’ rating on the stock at the current market price of $2.32, 01:00 PM (GMT+10), Sydney, Eastern Australia, (as on 1^st February 2022).

SGF Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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