Smartgroup: Too much but not enough

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
26 October 2021, 10:00 AM
Sectors Covered:
Diversified Financials, Professional Services

  • Smartgroup (ASX:SIQ) and TPG/Potentia (the consortium) have terminated takeover proceedings.
  • The consortium expressed interest to proceed at a lowered offer of A$9.25 (from A$10.35ps), which has been rejected by the SIQ board.
  • SIQ stated the group is on track for consensus earnings expectations (NPATA A$68m), implying modest 2H21 growth (creditable in light of lockdowns).
  • We return to an Add recommendation. SIQ’s earnings have been resilient in light of lockdowns; incremental growth should materialise from FY22; there is potential earnings upside if management execute on its Smart Future strategy; and we see capital management probable (not reflected in current forecasts).

Event: takeover talks cease

Smartgroup (ASX:SIQ) takeover discussions have ceased, with the consortium notifying SIQ it does not intend to proceed at the A$10.35ps offer.

SIQ noted the consortium expressed interest to proceed with a revised proposal (assuming non-binding) at A$9.25ps (a 17.7% premium to SIQ’s share price pre-offer). The SIQ board has rejected the offer and concluded not to proceed with discussions.

The revised offer dropped the implied FY21 PE multiples from ~20x (A$10.35ps) to ~18x (A$9.25ps). SIQ’s five year average PE is ~16x.

Back to fundamentals

SIQ stated the group is on track to deliver FY21 consensus earnings (~A$68.5m NPATA). This implies slight HOH growth (1H21 A$33.5m; implied 2H21 ~A$35m).

Whilst growth is subdued, we note lockdowns have been in place across VIC/NSW/ACT (all large contributing states for SIQ).

Vehicle delivery/fulfilment was a headwind in 1H21 and we expect this has continued through 2H21 (improvement in vehicle supply times should assist FY22). SIQ stated (in Aug-21) that July orders were above pre-COVID levels, however lockdowns have likely impacted order take through Aug-Oct. Logically, order take should improve once restrictions cease.

We forecast SIQ to have a net cash balance sheet position (~A$3m) by Dec-21. SIQ’s balance sheet position allows for capital management (in the absence of acquisitions). A ~14.5cps special dividend would ‘top-up’ SIQ’s payout to 100% and retain an approximate neutral position (no net debt).

Contract renewal: we note the QLD Government salary packaging contract has recently been tendered (SIQ and MMS incumbents; current contract expires Mar-22). We expect this would be a top-10 contract for SIQ given the counterparty. Contract renewal risk is perpetual for SIQ, however the group has a strong track record of client retention (noting two top-3 contracts were renewed recently).

Forecast and valuation update

We make no changes to forecasts, noting our FY21 NPATA of A$69.3m sits marginally ahead of consensus.

Our PE/DCF valuation moves to (login to view target price) after relatively minor assumption changes. We move our price target back to (login to view).

Investment view 

We move back to an Add recommendation.

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 see the resilience of 2H21 earnings in light of lockdowns as evidence of this).

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 ~6.2% FF yield. Risks around major contract renewal and add-on insurance earnings remain, however are significantly reduced compared to previous periods.

Price catalysts

Capital management; acquisitions; execution of organic growth targets.

Risks

Downside: loss of add-on insurance sales (deferred model or supplier issues); contract renewal risk; continued vehicle supply constrains; loss of volume-based incentive agreements or changes to finance/insurance commission structures.

Find out more

Download full research note

If you would like access or more information, please contact your adviser or nearest Morgans office.

Request a call  Find local branch

Need access to our research?

You are also welcome to start a two-week trial of our online platform, which provides access to detailed market analysis and insights, provided by our award-winning research team

Create trial account 

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

  • Print this page
  • Copy Link