Shares in Value Logo
Product Review Img Vertical

Date : 21/02/2022

Smartgroup Corp

ASX :

SIQ

Market Cap : $1.1 Billion

Dividend Per Share : $0.665

Dividend Yield : 7.93 %

Buy

52 Week Range : $5.82 - $9.99

Share Price : $8.38

SIQ has delivered a stellar perforamce and announced an interim and special dividend. We retain a "Buy".

Company Analysis

We have always said that Smartgroup (ASX: SIQ) is one of the top-quality ‘growth + dividend’ plays. Smartgroup provides employee management services such as compensation packaging, novated leasing, fleet management, payroll administration, employee share plan administration, and workforce optimisation.

Already one of the leaders in its space, Smartgroup has been paving the way for further growth for quite some time now. Last week, the company announced incredible profit growth – beating market expectations for full-year 2021.

Revenue and earnings numbers are in line with our forecasts from our first publication of Smartgroup.

Smashing Market Expectations

Revenue for the full year was $221.8 million, up 3% on the prior year to 31 December 2020. Operating EBITDA of $103.0 million is up 8% on the prior year and EBITDA margin improved by 2 percentage points to 46%, driven by disciplined cost management.

Profit after tax was $69.5 million for CY 2021, up 7% from the previous year. This strong result can be attributed to not only ongoing revenue growth but also the successful implementation of Smart Future program initiatives driving improved operational performance.

Dividends Galore

Smartgroup has generated a strong net operating cash flow of $78.3 million, representing 113% of NPATA, and maintains a flexible balance sheet with no net corporate debt.

Smartgroup’s capital-light business model and strong balance sheet have enabled the Board of Directors to declare a fully franked final ordinary dividend of $0.19 per share. The Board has also declared a fully franked special dividend of $0.30 per share.

This brings total dividends for the year to $0.72 per share. These dividends are payable on 23 March 2022, with a record date of 9 March 2022.

Exceptional Customer Service is the Key

Smartgroup’s clients come majorly from the Health and Government sectors, which means they earn above-average salaries. SIQ’s services are essential for high salaried employees in these sectors – as it helps customers reduce their tax liability.

This makes their business heavily reliant on customer service to ensure their customers stick around.

There was continued momentum and commitment to customer service, which drove operational performance. The company recorded strong organic growth of approximately 17,000 additional salary packaging customers during CY 2021, despite ongoing disruption to business activities due to COVID-19.

Approximately 8,500 of these packages were introduced from a new Health sector client onboarded in April 2021.

Smartgroup had a 100% success rate of renewing or extending all of the top 20 contracts falling due in CY 2021.

This included the company’s largest client, the Department of Defence, whose contract has been renewed for five years to June 2026, including extensions.

Almost all of the company’s salary packaging clients operate in attractive and growing sectors such as Health, Not for Profit, Education and Government.

New novated leasing vehicle orders continue to improve, increasing by a strong 14% on the prior year. However, delays in the global vehicle supply chain continued to affect the settlement timeframes for novated leasing vehicles.

This has resulted in an expanded pipeline of future deliveries, with open vehicle lease orders as of 31 December 2021 up 152% compared to 31 December 2020, representing an additional $12 million of future revenue (compared to $2 million as of 31 December 2020).

Smart Future delivers early and tangible benefits

The Company’s Smart Future program, announced in the second quarter last year, has been designed to set the foundations for future growth in EBITDA and shareholder returns. Smart Future focuses on three key strategic priorities: optimising the employer client and employee-customer experience, enhancing digital platforms and streamlining operations.

Smartgroup has seen early and tangible benefits from Smart Future. Improvements to digital leasing tools have resulted in a 60% growth in web calculator leads for new cars, together with an 80% increase in engagement with the calculator tool by customers.

The streamlining of customer journeys has led to improved leasing, customer Net Promoter Scores and better conversion of leads to vehicle orders.

Outlook

In the first few weeks of trading in 2022, Smartgroup’s novated leasing leads are up by 8% compared to the same period in 2021. The key digital deliverables from Smart Future are on track, and SIQ’s investments in people, processes and technology are delivering results that will continue through CY 2022.

As the supply crunch in cars eases in 2022, Smartgroup will be able to take advantage and drive additional revenues and profits.

“The Smart Future” program will enable SIQ to grow organically. They are migrating to a redesigned cloud-based software that will be streamlined towards achieving business automation. This means that SIQ’s platform will become more technologically advanced to gain an edge over its peers.

Smartgroup is known to be targeting:

  • $15-20 million annualised EBITDA uplift from the strategic initiatives, in addition to system growth of 2/3 from revenue expansion and 1/3 from sales and service efficiencies.
  • Sustainable EBITDA uplift expected to commence in H2 2022, building to targeted $15-20m in 2024.
  • Estimated $5-6m p.a. of digital investment over the next 3 years, funded from operational cash flows, of which $4m p.a. is expected to be CAPEX.

Our detailed earlier report can be accessed by clicking here.

The Verdict

Smartgroup has continued to prove its resilience, withstanding the ongoing impacts of COVID-19 and delivering strong operational results. The company generates high-quality earnings from a diversified customer base operating in growing sectors and with relationships based on long term contractual arrangements.

Smartgroup’s strong financial performance has allowed them to deliver a fully franked final ordinary dividend of $0.19 per share and a fully franked special dividend of $0.30 per share. SIQ shares trade with a dividend yield of 9% at current prices. We retain our “Buy” recommendation on Smartgroup.

Scroll to Top

Login

By submitting this form, I agree to the TERMS AND CONDITIONS and PRIVATE POLICY