Continuing to add bolt-on acquisitions
Smartgroup recently acquired AccessPay for A$15m (A$14.7m cash, A$0.3m scrip), an Adelaide-based packing business servicing the PBI segment. The acquisition represents an implied EV/EBITDA multiple of ~6.5x (A$2.3m EBITDA). SIQ intends to expense ~A$2m (pre-tax) in one-off integrations costs (A$1.5m FY; A$0.5m FY18).
After integration expenses, AccessPay is expected to contribute EBITDA of A$0.5m in FY17 and A$4m in FY18. AccessPay currently administers 40,000 salary packages and ~600 novated leases, across ~500 employer groups. SIQ should have an opportunity to increase novated lease penetration within the AccessPay client base (~1.5% for AccessPay compared to ~3% for Advantage at the time of acquisition and ~25% for the original Smartsalary business).
Incremental earnings uplift – shoring up FY17/18 growth profile
SIQ stated it expects the AccessPay acquisition to be ~4% accretive to FY18 EPS (based on consensus EPS of ~49.7cps at the time of announcement; implying management comfort with ~51.7cps FY18 EPS post acquisition). Our previous and updated FY18 EPS forecast (52.7c and 52.9c respectively) sit slightly above this level. Management stated that the business continues to trade well and the group is 'off to a positive start' in CY17. We have made minor changes to forecasts, adding in the AccessPay acquisition and adjusting shares on issue.
Smartgroup (SIQ) is delivering solid organic growth via scale benefits; driving operational efficiency via technology development; and an ongoing focus on its customer centric model. Revenue synergies from recent acquisitions provide further growth opportunity, and we see further acquisitions as the major upside risk.
With SIQ having a strong track record of execution (and solid cash flow and balance sheet capacity to fund further opportunities). Downside risks include major contract losses; acquisition integration risk; slower-than-expected novated lease uptake; and regulatory change.
We retain our Hold recommendation.
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Disclaimer(s): Analyst owns shares.
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