Smartgroup Adding Scale To Growth
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Vehicle leasing and salary packaging business Smartgroup ((SIQ)) continues to consolidate the sector, acquiring two businesses to add further scale. The acquisitions of RACV Salary Solutions and Aspire Benefits Management will complement its existing salary packaging and novated leasing business and be funded by existing cash and debt facilities.
Macquarie upgrades forecasts for earnings per share in 2018 by 12.9%. The broker believes the acquisitions have been made on attractive financial terms, while management has a demonstrated ability to extract synergy benefits such as better trading terms and productivity improvements.
Macquarie believes the stock deserves to trade at a premium to its peer group. Over the past two years it has commanded an 11% premium but this has narrowed and it is now trading in line with peers. The business is considered well-managed and Macquarie is attracted to the financial returns, strong cash flow and capital light model.
Ord Minnett is also attracted to the stock on that basis and initiates coverage with an Accumulate rating and $9.60 target, implying a 12-month total shareholder return of 10%. The broker's investment case is predicated on market leadership, as the company has around 34% share of externally-managed salary packages in Australia. There is also a high win rate on tenders and a track record of value-accretive acquisitions.
Over the medium term the broker believes earnings will be driven by organic growth, based on an evaluation of the salary packaging and novated leasing markets across state & federal governments and universities, amid opportunities in the health sector. This growth will come via new tenders and an increase in the penetration of the existing workforce of employer clients.
Morgans expects execution risk will be relatively low as the company has consolidated the sector over the past two years. Nevertheless, RACV Salary Solutions appears to be the last private business of scale and meaningful opportunities will now become more difficult to obtain. The acquisitions result in around 12% upgrades to 2018 forecasts for earnings per share.
Morgans estimates acquisition synergies of around $5.8m, broadly split between revenue/margin and cost savings. The company's expects the for synergy benefits to be realised in the second half of 2018. The company has acquired six businesses over the past two years, driving the majority of 2016-18 growth.
Adelaide-based RACV Salary Solutions provides salary packaging administration and novated leasing services and will be acquired for $34m, including $7m subject to targets. Smartgroup has acquired the business on around 6.8x FY17 operating earnings (EBITDA) and around 3.8x with the full synergies are factored in.
Sydney-based Aspire Benefits Management, a specialist novated leasing provider, will be acquired for $6.2m, including $600,000 subject to targets. The business is acquired on circa 5.2x FY17 operating earnings and around 2.0x after the full synergies are factored in. Combined, these two add 14.8% to salary packaging customers and 11% to the novated lease car pool.
FNArena's database shows five Buy ratings and one Hold (Credit Suisse, yet to comment on the acquisitions). The consensus target is $9.03, suggesting -0.8% downside to the last share price. Targets range from $8.00 (Credit Suisse) to $9.90 (Macquarie).
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