Smartgroup: Bumpy conditions, but still strong cash delivery

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

29 August 2022, 9:30 AM

Sectors Covered:

Diversified Financials, Professional Services

• Smartgroup (ASX:SIQ) reported 1H22 NPATA of A$32.4m, in-line with expectations.
• Lease orders slowed in 2Q22 (1H22 down 7% on pcp). Short-term, SIQ face ongoing constrained vehicle supply, slower lease demand and wage inflation.
• Whilst vehicle orders slowed, they were still above settlements (~A$2m incremental NPAT in the half). July/Aug orders were flat on pcp.
• The likely introduction Labor’s EV policy will stimulate novated lease demand. The current hurdles are policy certainty (3-yr review date) and affordable EV supply.
• On ~12.4x FY22 PE (vs 15.5x avg) and ~7.5% FCF yield, SIQ is again looking undervalued. However, we retain a Hold, looking for some improved confidence in the near-term demand trajectory; EV policy certainty; or a lower entry point.

1H22 result: Flat EBITDA, however inflation pressure vs 2H21

SIQ reported 1H22 revenue +3.7% to A$113.6m; EBITDA (pre-guided) flat at A$49.6m; NPATA -3.5% to A$32.4m; and DPS of 17cps (down 3%). Half-on-half NPAT was down 10% (2H21 A$36m).

1H22 NPATA included a non-recurring A$1.3m positive one-off (as did 2H21) from finance provider agreements. Operating cash flow of A$43.5m (134% conversion) also benefited from finance arrangement changes (~99% conversion excluding this). Net debt is A$26m.

SIQ noted wage inflation, which in part came through in 1H22. Opex growth was 6.5% on the pcp. Normalised EBITDA margin (ex the A$1.3m one-offs) of 42.8% was down 240bps on pcp (45.2% and down 410bps on 2H21 (46.8%).

Lease orders slow

Salary packages: SIQ added 5,500 (1.5%) to the package base with a further 6,000 client to be onboarded in 2H22 (partially offsetting the VIC DET contract loss). ▪ SIQ’s novated leases under management fell ~3% over the half to 62,800, with new demand not matching finalisations at lease maturity.

Leads were +15% on 2H21 and +6% on pcp; Vehicle orders were in-line with 2H21 however down 7% on pcp. Settlements (reflecting supply challenges) were +1% on the pcp (down 1% on 2H21). SIQ noted low consumer confidence and lead times are delaying purchasing decisions.

Orders in July/Aug are flat on the pcp which mgmt stated was just before Covid impacts (the remainder of the pcp was relatively weak due to lockdowns). Positively, lease yields are +5% on the pcp (+2% on 2H21) which is assisting marginal revenue growth.

Contract loss in FY23: the previously disclosed VIC contract loss will transfer in 4Q22 (~9,000 package). We estimate this at ~A$9m revenue pa (some lease contract settlements will push into 1H23). We expect SIQ may be able to continue to provide novated leases to DET employees (common on large Gov’t contracts).

Incremental revenue: orders still outstripped deliveries by ~A$2.7m in revenue (~A$14m of ‘excess’ order revenue in total, up A$2.7m). Normalising for this impact (alone), SIQ would have delivered an additional A$2m NPATA.

Outlook: SIQ highlighted “short to med-term headwinds” from delayed consumer purchasing decisions and wage inflation flowing though. The Smart Future program will push out, however the targeted A$15-20m EBITDA benefit in FY24 is still on track.

Labor’s EV policy should be a significant tailwind for the sector. Clarity is required on the 3-yr ‘review date’, which will be important for lease demand.

Forecasts lowered by 6-8%

Our FY22-24 EPS is lowered by 6-8%, primarily on higher opex.

Investment view

SIQ faces a more challenged consumer demand environment, although we expect novated lease demand to be relatively resilient. Stimulated demand via Labor’s EV policy could be a meaningful driver.

Solid value is now present; however, after a sentiment knock (contract loss June; outlook miss with this result), we are looking to have higher confidence in the demand trajectory; or a better entry point.

Price catalysts and Risks

• EV policy driving lease demand; capital management/acquisitions.
• Downside: slower demand; contract renewal risk; continued vehicle supply constraints; loss of volume-based incentive agreements or changes to finance/insurance commission structures.

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