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Date : 23/08/2021

Smartgroup Corp

ASX :

SIQ

Market Cap : $1.01 Billion

Dividend Per Share : $0.495

Dividend Yield : 6.20 %

Buy

52 Week Range : $5.19 - $7.99

Share Price : $7.96

New contracts, cost cuts, increased profitability and solid dividends. We recommend a "Buy"

Company Analysis

Smartgroup Corporation Ltd (ASX: SIQ) is an Australian company that provides employee management services such as compensation packaging, novated leasing, fleet management, payroll administration, employee share plan administration, and workforce optimization.

SIQ is one of Australia’s largest employee management services companies handling over 360,000 customers and 90,000 vehicles in both novated and fleet modes. PBI non-health comprises 43% of the company’s customer base that includes national, state, and local based aged care, disability care and charitable organisations.

SIQ shares have returned over 12% thus far since our recommendation to Buy back May. Last week, the firm announced their half year earnings and the result has been in line with the assumptions and estimates we made in our report. We were expecting a fairly flat performance as far as growth is concerned. However, we fully expected SIQ to cut costs, streamline operations and deliver a 45% EBITDA margin – up from about 37% in FY20 full year, and that’s exactly what SIQ has done. At the halfway mark, SIQ delivered a 45% EBITDA margin.

Resilient Operations

As the job market and the broader economy has improved in 2021, SIQ revenues grew 4% to $109.4 million compared to the previous 6 months. The Company recorded strong organic growth of approximately 13,000 additional salary packaging customers during H1 2021 and now manages a total 373,500 packages. This was achieved despite client on-site sales activities being restricted due to COVID-19 outbreaks. Approximately 8,500 of these packages were introduced from a new health sector client onboarded in April this year. Pleasingly, Smartgroup had a 100% success rate renewing or extending all of the top 20 contracts falling due this calendar year. Importantly our largest client, Department of Defence, which has been with Smartgroup since 1999, renewed for five years, inclusive of extensions.

New lease vehicle orders increased to pre-COVID levels in Q2 this year. However, vehicle supply disruptions have resulted in longer lead times, building a pipeline of future settlements. Despite supply constraints, leasing settlement volumes were up 2% on pcp and 4% on H2 2020. As a result of these supply issues, novated leases under management were down slightly to 65,600 and managed fleet vehicles grew modestly to 25,100.

Numbers in line with our Expectations

Interim 2021 Net Profit After Tax and Amortisation (NPATA of $33,536,000 represents an increase of 5% over the half year to 30 June 2020 and a 1% increase over the half year to 31 December 2020. Transition of the Advantage business model and the launch of the Smart Future program are well underway and going to plan.

The full implementation of the program is estimated to result in a $15-20 million annual EBITDA uplift by 2024 (in addition to the normal organic growth expectations of the business), with two-thirds of this coming from revenue expansion and one third from sales and service efficiencies. The program is estimated to cost $5-6 million per annum from 2021 to 2023, of which $4 million per annum is currently expected to be capitalised.

Smartgroup estimates that it generated approximately $4.8 million in commissions, funding revenue and other revenue related to the sale of add-on insurance products, for the half year to 30 June 2021.

Disciplined cost management has led to a strong EBITDA margin of 45% for the half year. Net debt sits at a comfortable $4.5 million and Net profit after tax of $26.5 million was delivered – 53% higher than the first half of 2020. Thus, Smartgroup announced an interim dividend yield of $0.175 a share – taking the annual dividend yield to 6.2%.

Our initial report can be viewed by clicking here.

Verdict

The expectation from Smartgroup is more of the same for the remainder of the year. The growth is going to be flat in 2021 given the effects of the pandemic and the markets have already priced this in. The narrative for SIQ is all about their new Smart Future Program which will bring increased profitability and as a result – lead to increased dividend payouts. On successful implementation of the strategy and a return to normal following the pandemic’s successful handling, SIQ will be positioned to drive growth. We continue to recommend long-term investors to “Buy”.

 

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