Smartgroup: Recovery underway, masked by vehicle delay
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Date posted:
- 23 August 2021, 9:00 AM
- Sectors Covered:
- Contractors/Developers, Diversified Financials
- Smartgroup (ASX:SIQ) reported 1H21 NPATA of A$33.5m (+4.5% on pcp), in-line with expectations.
- Novated lease orders ended 2Q21 ~3% above pre-covid levels, however settlements lagged (~11% below pre-covid) given vehicle supply constraints. This has resulted in an order book +19% on 2H20 and securing a solid 2H21.
- Activity levels have improved, however SIQ’s short-term outlook was caveated with covid lockdown uncertainties. Medium-term growth relies on strategy execution to rejuvenate organic growth (‘Smart Future’ program).
- SIQ ended with A$4.5m net debt, allowing for another special dividend or acquisitions. We think a ~14.5c special div in 2H21 is probable (not in forecasts).
- After an add-on insurance/covid earnings reset, we believe SIQ’s earnings base is now more sustainable. Whilst we expect relatively low growth from SIQ, we think the FCF yield (~7%) and balance sheet strength is fairly attractive. Upgrade to Add.
Event: 1H21 result in line
Versus 2H20, SIQ reported: revenue +4% to A$109.4m; EBITDA +5% to A$49.5m; EBITDA margin +41bp to 45.2%; NPATA +1% to A$33.5m; and DPS of 17.5c, up 3% on pcp. The result was all in-line with expectations.
SIQ ended with A$4.5m net debt. We expect slight net cash by Dec-21. ▪ Salary packages rose meaningfully with the onboarding of a new health client (8,500 packages) in April-21. Total packages were +5% to 373,500. Novated leases slipped 1.6% (to 65,600), impacted by the delay in lease settlements.
Analysis: lease demand above pre-covid levels
Lease demand better than the financials reflect: lease settlements were up 4% on 2H20 with yield down ~3%, leading to flat hoh divisional EBITDA. However, new lease orders in the period were up 19% on 2H20. In previous periods orders and settlements has effectively aligned (small lag time to deliver a car), however with current supply constraints settlements have been delayed.
On our estimates, the delayed revenue impact would be ~A$7-9m (~7% increase to result); equating to potential NPATA of ~A$4m (+12% increase to result).
Lockdowns a caveat to the outlook: SIQ stated that July new lease orders were at pre covid levels and packaging numbers were strong. However, ongoing lockdowns are likely to have an impact on 2H21 orders.
Base earnings look fairly ‘clean’ here: SIQ faces some small headwinds including minor pricing pressure from recent contract renewals and likely yield pressure upon the full introduction of the deferred sales model (Oct-21). We estimate add-on insurance revenue is now ~A$10-14m (greatly reduced from historic levels) and other commission structures look to be maintainable.
From its ‘Smart Future’ program, SIQ is targeting A$15-20m EBITDA uplift in FY24 (above ‘system growth’). Our FY24F EBITDA is A$20m above FY21F. Assuming ‘system growth’ is ~4% pa, this would lead to ~A$115m EBITDA, implying managements targets are meaningfully above our current forecasts.
Forecast and valuation update: EPS upgrades
EPS forecasts are upgraded by ~1%. Valuation increases to (login to view target price).
View: upgrade to Add; low growth but earnings base looks to be in
Whilst SIQ’s growth profile is relatively subdued, we believe the revenue composition is now more sustainable and 1H21 should be a base on which to grow. We are encouraged by leasing orders now above pre-covid levels.
Major contract risk has largely past and add-on insurance earnings risk is now manageable (~10% of group total). SIQ’s balance sheet is strong and if acquisition opportunities don’t arise we see the opportunity for a continued 100% dividend payout (via specials), equating to ~7% ff yield. We upgrade to Add.
Capital management/acquisitions; execution of organic growth targets.
Downside: loss of add-in insurance sales (deferred model or supplier issues); contract renewal risk; continued vehicle supply constraints; loss of volume-based incentive agreements or changes to finance/insurance commission structures.
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