Smartgroup: Too much but not enough
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 26 October 2021, 10:00 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- Smartgroup (ASX:SIQ) and TPG/Potentia (the consortium) have terminated takeover proceedings.
- The consortium expressed interest to proceed at a lowered offer of A$9.25 (from A$10.35ps), which has been rejected by the SIQ board.
- SIQ stated the group is on track for consensus earnings expectations (NPATA A$68m), implying modest 2H21 growth (creditable in light of lockdowns).
- We return to an Add recommendation. SIQ’s earnings have been resilient in light of lockdowns; incremental growth should materialise from FY22; there is potential earnings upside if management execute on its Smart Future strategy; and we see capital management probable (not reflected in current forecasts).
Event: takeover talks cease
Smartgroup (ASX:SIQ) takeover discussions have ceased, with the consortium notifying SIQ it does not intend to proceed at the A$10.35ps offer.
SIQ noted the consortium expressed interest to proceed with a revised proposal (assuming non-binding) at A$9.25ps (a 17.7% premium to SIQ’s share price pre-offer). The SIQ board has rejected the offer and concluded not to proceed with discussions.
The revised offer dropped the implied FY21 PE multiples from ~20x (A$10.35ps) to ~18x (A$9.25ps). SIQ’s five year average PE is ~16x.
Back to fundamentals
SIQ stated the group is on track to deliver FY21 consensus earnings (~A$68.5m NPATA). This implies slight HOH growth (1H21 A$33.5m; implied 2H21 ~A$35m).
Whilst growth is subdued, we note lockdowns have been in place across VIC/NSW/ACT (all large contributing states for SIQ).
Vehicle delivery/fulfilment was a headwind in 1H21 and we expect this has continued through 2H21 (improvement in vehicle supply times should assist FY22). SIQ stated (in Aug-21) that July orders were above pre-COVID levels, however lockdowns have likely impacted order take through Aug-Oct. Logically, order take should improve once restrictions cease.
We forecast SIQ to have a net cash balance sheet position (~A$3m) by Dec-21. SIQ’s balance sheet position allows for capital management (in the absence of acquisitions). A ~14.5cps special dividend would ‘top-up’ SIQ’s payout to 100% and retain an approximate neutral position (no net debt).
Contract renewal: we note the QLD Government salary packaging contract has recently been tendered (SIQ and MMS incumbents; current contract expires Mar-22). We expect this would be a top-10 contract for SIQ given the counterparty. Contract renewal risk is perpetual for SIQ, however the group has a strong track record of client retention (noting two top-3 contracts were renewed recently).
Forecast and valuation update
We make no changes to forecasts, noting our FY21 NPATA of A$69.3m sits marginally ahead of consensus.
Our PE/DCF valuation moves to (login to view target price) after relatively minor assumption changes. We move our price target back to (login to view).
We move back to an Add recommendation.
Whilst SIQ’s growth profile is relatively subdued, we believe the revenue composition is now more sustainable and 1H21 should be a base on which to grow (we see the resilience of 2H21 earnings in light of lockdowns as evidence of this).
SIQ’s balance sheet is strong and if acquisition opportunities don’t arise we see the opportunity for a continued 100% dividend payout (via specials), equating to ~6.2% FF yield. Risks around major contract renewal and add-on insurance earnings remain, however are significantly reduced compared to previous periods.
Capital management; acquisitions; execution of organic growth targets.
Downside: loss of add-on insurance sales (deferred model or supplier issues); contract renewal risk; continued vehicle supply constrains; loss of volume-based incentive agreements or changes to finance/insurance commission structures.
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