Smartgroup Corporation Limited

 
Announcement of Resignation of its CEO and MD: Smartgroup Corporation Limited (ASX: SIQ) is an employee management services’ provider, primarily involved in providing salary packaging, fleet management as well as other employee management services for organisations across Australia. The company recently notified about the resignation of its Managing Director (MD) and Chief Executive Officer (CEO), Deven Billimoria, effective at the end of February 2020 after the release of FY19 results. Following the retirement, SIQ’s CFO Tim Looi will be appointed to the role of MD and CEO. The company has also confirmed that it expects to earn an NPATA of around $81 million for the year ended 31 December 2019. Recently, the voting power of a substantial holder, Mitsubishi UFJ Financial Group, Inc, was brought down from 9.26% to 5.68%.
 
5% Increase in H12019 NPATA and Dividend: For the half year ended 30 June 2019, Smartgroup Corporation Limited earned NPATA of $40.5 million, which was 5% higher than the previous corresponding period. The increase in NPATA was passed on to the company’s shareholders by the Board of Directors, as they decided to pay fully franked interim dividend of 21.5 cents per share, up 5% on pcp. During the half year period, the company experienced success in expanding service offering along with positive financial performance and client growth.
 

 
H12019 Financial Performance (Source: Company Reports)
 
Stock Recommendation: In the last six months, SIQ’s stock has provided a return of 28.84%, however, in the last one month, the stock has declined by 8.26%. On the valuation front, SIQ’s stock is currently trading at a price to earnings multiple of 23.190x, which is significantly higher than the industry median of 7.9x, demonstrating that the stock may be overvalued. EV/sales ratio which currently stands at 5.9%, also higher than the industry median of 2.1%. Taking into consideration, current valuation metrics, recent price volatility, and the resignation by the CEO, we have a wait and watch view on the stock at the current market price of $9.490, down 13.649% on November 18, 2019, due to the announcement stating the resignation of the current MD and CEO, Deven Billimoria.
 
 

Prospa Group Limited

 
Update on CY19 Prospectus Forecast: Prospa Group Limited (ASX: PGL) is mainly involved in providing cash flow products and services that allow small businesses to prosper. On 18 November 2019, the company made an update to its 2019 calendar year Prospectus forecast (CY19), wherein it announced that it expects its CY19 originations to be above Prospectus forecast at $574.5 million, up 32% on the previous corresponding period (pcp) and up 2.7% ahead of Prospectus forecast. The company expects its revenue to be at $143.8 million, up 16% on pcp, however, down 8% on Prospectus forecast.  The revision in the guidance is mainly due to the premiumisation strategy exceeding the company’s forecast. Due to the benefits of premiumization, the company now expects its operating expenses for CY19F to be at $130 million as compared to Prospectus at $136.4 million. The company also highlighted that it is witnessing increased appetite for its solutions from premium credit quality customers who pay lower-interest rates over the long term. The company’s early loss indicators are also exhibiting improving trends, driven by the impact of premiumisation and the Credit Decision Engine’s ability to better predict customer credit quality across the company’s entire portfolio.
 
Prospa Group Eying to Increase Addressable Market: In the recently released UBS Conference presentation, the company highlighted about increasing addressable market through market expansion to New Zealand. Prospa Group Limited believes that New Zealand has market dynamics similar to Australia, with risk performance in-line with expectations and significant investment in CY19. Rapid market penetration & originations by Prospa Group Limited are expected to scale over CY19 and beyond. The introduction of PGL’s new rate card for its flagship small business loan product, continued growth in the New Zealand market and the contribution from new products have delivered strong growth in originations across the business.
 
Furthermore, the company is aiming for product development to increase its addressable market.
 

Cumulative Originations (Source: Company Reports)
 
Outlook and Stock Recommendation: Prospa Group Limited intends to continue acceleration in the New Zealand market to secure market leadership. The company expects investment in new solutions to underpin the future growth. In FY20, the total originations are expected to be in the range of $626 million - $640 million, demonstrating 25-28% growth on FY19. In FY20, the company expects to earn revenue of at least $150 million. PGL’s stock was listed on ASX on 11 June 2019 and has witnessed a decline of 13.45% since then. Considering the benefits of the premiumisation strategy, PGL’s efforts in increasing the addressable market, and outlook for FY20, we recommend a “Hold” rating on the stock at the current market price of $2.800, down by 27.461% on 15 November 2019, on account of the updation in prospectus forecast.

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