Insights from the Reporting Season Wrap
Dive into the latest edition of The Month Ahead as we dissect the insights gleaned from the recent reporting season. Amidst the influx of information, we've identified three standout companies that emerged with promising investment prospects from their biannual earnings reports in February. Discover why Australia’s leading lottery operator, The Lottery Corporation, along with salary packager Smartgroup, and essential services provider Ventia deserve your attention as potential investment opportunities.
Smartgroup
If you haven’t heard much about the Government’s Electric Car Discount Policy which was introduced in November 2022, it has started to gain early traction and you’re likely to hear more as the number of electric vehicles (EVs) purchased in Australia increases. In Australia, EV sales made up ~3% of total vehicle sales in 2022 and this is set to rise, as it has in many other countries, on the back of policy-led demand. On part of the policy will allow many employees to take up EV ownership via salary-sacrifice (a novated lease) in a tax advantaged manner (this is not tax advice) to lower the cost of an EV versus a traditional vehicle.
One segment of the market which is set to directly benefit from the policy and the evolving focus on sustainability is the fleet managers and salary packaging businesses. Smartgroup (SIQ) operates in the segment as one of the two largest salary packers in Australia (alongside McMillan Shakespeare). Smartgroup has faced several pressures in recent years which have seen earnings fall from highs set in 2019. Pressures have included COVID-19 disruption, supply issues, wage inflation and heightened competitive activity (including a large contract loss). Despite this, Smartgroup has delivered solid profitability and the strength of the balance sheet has allowed special dividends in recent years (Smartgroup announced that there will be a special and ordinary dividend payment at the time of writing). Whilst some pressure remain, stronger EV demand should flow directly into the uptake of novated leasing; SIQ’s core offering and revenue driver. The stock has had a reasonable share price run of late and trading back broadly in-line with its average multiple however earnings now have a tailwind. As with all small/mid-cap companies, risks around execution exist.
In its recent result release, Smartgroup stated ‘there has been a significant uptick in EV demand since the introduction of the Electric Car Discount Policy in November 2022, with an increase of c.270% in novated leasing quotes for EVs in Q4 2022 compared to average EV quotes in Q1 to Q3 2022. The legislative change makes leasing of electric vehicles more appealing, and we have seen strong interest from all segments, particularly from our government and corporate clients, presenting a significant opportunity for Smartgroup.'
The Lottery Corporation
Last year's demerger of Tabcorp resulted in the spin-off of a powerful lotteries and Keno business into a separately listed vehicle called The Lottery Corporation (TLC). The business has long been one of the highest performing lottery companies in the world. This is the fact that was underlined by an impressive first half earnings result last month that saw EBITDA rise by 16% to more than $400m. The excitement generated by a $160m Powerball jackpot during the period was a huge positive for customer demand.
The Lottery Corporation has long dated and exclusive licences to operate lotteries all over Australia (except for Western Australia). Lottery ticket sales are resilient to cyclicality and there is even some evidence that demand may even increase in an economic downturn. As The Lottery Corporation’s CEO commented last month 'history says demand for our products is quite resilient and relatively inelastic compared to other consumer products (and) we're not seeing anything in recent trading that fundamentally changes that view.' The Lottery Corporation’s cash flows are steady and predictable and there is a low ongoing need for capital. These characteristics mean we expect The Lottery Corporation to be able to continue pay a fully franked ordinary dividend at a very high payout ratio, while still paying down debt steadily. This may create the opportunity for future capital management over and above the special dividend declared last month.
We have an ADD rating on The Lottery Corporation and a $5.60 target price, which has already increased by 20c since we initiated coverage last year.
Ventia
Ventia (VNT) is one the largest providers of essential services in Australia and New Zealand. It ensures infrastructure assets function safely and efficiently throughout their lifecycle by offering the full range of operations and maintenance services, as well as facilities management, environmental services and minor capital works. Ventia works predominately with the government (77% of revenue). It has an average contract tenure of 5.4 years and direct inflation passthrough in most contracts. The industry grows at 6-7% p.a., with Ventia growing 7-10% through industry growth and contract expansion. Margins should remain stable, potentially delivering dividend growth of high single digits. The stock has a current dividend yield of nearly 7% growing at mid-single digits and trades on an undemanding forward price/earnings ratio of 10-11x.
In the recent result, Ventia’s CEO Dean Banks said: ‘Ventia’s Board and Management anticipate continued stable and considered growth. We expect revenue and earnings momentum will remain as the demand for essential services, underpinned by recent record infrastructure spend continues. Ventia’s business fundamentals and differentiated strategy provides a strong business outlook. This gives us confidence to today announce our 2023 guidance range for NPATA growth of 7-10% compared to FY22 pro forma NPATA.'
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