Smartgroup: Takeover comes for a strong cash flow generator

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
30 September 2021, 8:00 AM
Sectors Covered:
Diversified Financials, Professional Services

  • Smartgroup (ASX:SIQ) has received a non-binding indicative offer (NBIO) from TPG Global and Potentia Capital (consortium) at A$10.35ps cash (+32% on previous close).
  • The offer implies FY21F multiples of ~20x PE and ~14x EV/EBIT, a premium of ~20-25% above SIQ’s medium-term averages.
  • Four weeks exclusive due diligence has been granted. Based on current information, the Board intends to unanimously recommend the offer.
  • In our view, the premium offered and Aware Super indicating they will participate in the proposal as an equity co-investor show solid intent to complete the deal.
  • We move to a Hold given the premium to our (arguably conservative) previous valuation of (login to view).
  • Our target price is set in-line with the offer, which represents 11.5% upside. Whilst there is the usual risk of the offer being withdrawn, we consider completion of this deal is more likely given SIQ’s resilient earnings base; clean balance sheet; strong cash flow; and recently renewed long-term contracts.

Event: Non-binding offer received  

SIQ has received a NBIO from the Consortium for cash consideration of (login to view), reduced by any dividend or return of capital paid prior to implementation. Any franking credits received via a dividend will be in addition to the offer price (we note SIQ has ~A$30m, or 22cps in franking credits).

The Board has granted four weeks exclusive due diligence. The proposed offer is subject to completion of due diligence to the Consortium’s satisfaction, SIQ’s Board approval and negotiation and agreement of terms.

Based on current information, the Board intends to unanimously recommend shareholders vote in favour of the offer.

Analysis: Solid offer premium

Solid offer premium: The NBIO is at a ~24% premium to our current valuation and implies a ~20x FY21F PE and a ~14x EV/EBIT compared to SIQ’s five-year average of ~16x and ~11.5x, respectively.

Closest peer MMS has averaged ~12.5x PE and 10x EV/EBIT. Whilst there are not any pure global comps, Element Fleet Management (owns Custom Fleet in Australia) currently trades at 14.7x FY22F PE.

Competing offer unlikely: we view the likelihood of a competing private equity offer as very low given the valuation. An offer from an industry player is possible; however, we also view this as unlikely given the offer price and valuation of closest peer MMS (13.8x PE) as an alternative.

For competition reasons, we think MMS is ruled out of any merger (~90% of the salary packaging market combined).

Solid intent shown: we view the solid premium offered and Aware co-investing in the new proposal as showing solid intent by the consortium in completing this deal. We view SIQ’s financials and balance sheet as clean and the group has high cash conversion.

We view FY21 as a solid base earnings from which SIQ can rejuvenate its growth profile and note large long-term contract renewals have been executed in CY21. In combination, we think these points provide higher confidence this takeover will proceed.

Forecast and valuation update

We make no changes to forecasts.

We set our price target in-line with the offer price of (login to view).

Investment view: move to HOLD with fairly equal upside/downside

Whilst we think completion is more likely than not, we move to a Hold rating as we see fairly evenly upside/downside returns (ie, 11.5% upside to the offer price and ~11% downside to our previous valuation).

Price Catalysts

Takeover bid formalisation/withdrawal.

Competing higher offer.

Risks

Current upside/downside revolves around the takeover offer.

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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.

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