Smartgroup Corporation Ltd

SIQ Details

SIQ’s Share tumbled ~7% over SSPL Stake Sale Announcement: Smartgroup Corporation Ltd (ASX: SIQ) is involved in outsourced administration activities such as salary packaging, novated leasing, fleet management and software, distribution and group services. Recently, Smart Packages Pte Ltd (SPPL, a long-term investor in the company with ~32% stake) announced sale of around 25% stake in Smartgroup Corporation Ltd, underwritten by Macquarie. In another update, the company announced that Smart Packages Pte Ltd, ceased to be a substantial shareholder of the company, effective from 17 October 2019. Besides this, the company informed the market about resignation of Amanda Morgan as Company Secretary. Jonathan Swain of Company Matters Pty Ltd had been appointed as Company Secretary, effective from August 19, 2019. 

H1FY19 Key Highlights for the period ended June 30, 2019:Profit after tax (NPATA) for the period rose by 5% to $40.5 Mn as compared to the previous corresponding period. Revenue for the period was reported at $125.8 Mn, which was an increase of 3% over the previous corresponding period. This can be attributed to net c.5,000 growth in salary packages as well as c.1,000 growth in the Novated Leasing (NL) carpark. Despite a 9% year-on-year fall in domestic private vehicle sales, NL settlements were relatively flat compared to the prior year. Due to a skew towards lower-priced vehicles for settlements and full impact of vehicle manufacturers extending mechanical warranties, NL yield fell by c.2% from the prior year.

Company’s net debt balance as on June 30, 2019 was reported at $32.5 Mn. The Board of Directors declared a fully franked interim dividend of 21.5 cents per share, which is an increase of 5% on pcp. The record date and payment date were on September 2, 2019 and September 16, 2019, respectively.

During the period, the company progressed in the integration of acquired businesses, with c.38,000 packages from the Salary Solutions acquisition. The number of full-time employees (FTE) at the end of the half-year was reported at 703 as compared to 712 FTE in the previous corresponding period. On April 1, 2019, the group acquired Mylease from iNovation Pty Ltd for $6,900,000 in cash, including $1,000,000 retained in escrow. Mylease administers c.1,000 novated leases across c.500 employer clients. On June 1, 2019, the group acquired Pay-Plan Pty Ltd and Set Leasing Pty Ltd for $2,200,000 in cash, including $700,000 retained in escrow. PayPlans administers c.1,500 packages and c.500 novated leases across c.30 employer clients.


H1FY19 Income Statement (Source: Company Reports)


What to Expect:As per the release, the company delivered positive financial performance, client growth and continued success in expanding its service offerings in the first half of FY19. It is continuously making progress with the integration of acquired businesses and is determined in improving customer outcomes by increasing focus over operational outcomes.

Stock Recommendation:SIQ’s share generated a positive YTD return of 5.14%. Its gross margin, EBITDA margin and net margin for H1FY19 stood at 96.8%, 46.9% and 24.5%, better than the industry median of 40.2%, 27.0% and 7.6%, respectively, implying decent fundamentals for the company. Its ROE for H1FY19 stood at 10.9%, better than the industry median of 9.9%. Its debt to equity ratio for H1FY19 stood at 0.28x, lower than the industry median of 0.32x. However, on the valuation front, its EV/Sales, EV/EBITDA, Price to Equity, and Price to Cashflow multiples on TTM basis stand at 6.6x, 14.0x, 25.530x, and 17.8x, higher than the industry median of 2.1x, 6.9x, 7.7x, and 4.2x, respectively, indicating an overvalued position at the current juncture. Hence, considering the aforesaid facts and current trading levels, we recommend a “Sell” rating on the stock at the current market price of $11.250, down 7.025% on October 18, 2019 on account of stake sale of 25% by Smart Packages Pte Ltd in the company.


SIQ Daily Technical Chart (Source: Thomson Reuters)

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