The headwinds hitting the salary packing and fleet management sector
The share prices of the four major players in the Australian salary packaging and fleet management sector have been significantly marked down in recent months. Does this negativity create a buying opportunity?
Their collective recent results and near-term earnings guidance is generally uninspiring, however selling on an average prospective PE of 11X and a dividend yield of 6.1 per cent, we wonder if this current negativity will be relatively short-lived.
| Company Name | Smart Group | McMillan Shakespeare | SG Fleet | Eclipx |
| ASX Code | SIQ | MMS | SGF | ECX |
| Share Price | $6.93 | $11.19 | $2.20 | $1.53 |
| Shares on Issue | 131.7m | 77.4 | 262.2 | 319.6 |
| 12-month H/L | $12.65 / $6.72 | $16.97 / $11.19 | $3.25 / $1.98 | $2.03 / $0.57 |
| Market Capitalisation | $912m | $866m | $577m | $489m |
| Net Debt | $21m | $280m | $76m | $189m |
| Enterprise Value | $939m | $1146m | $653m | $678m |
| Period to 31/12 | 12 months | 6 months | 6 months | 12 months to 30/9 (core) |
| Revenue ($m) | $276.1 (+4%) | $279.1 (+2%) | $249.2m (+1%) | $173.3 (-5%) |
| EBITDA ($m) | $117.8 (+2%) | $92.2 (-7%) | $53.5m (-15%) | $81.9m (-5%) |
| Net Profit (A) ($m) | $77.3 (+3%) | $37.1 (-9%) | $24.5m (-17%) | $46.5m (-19%) |
| Forecast Net Profit (A) for year ahead ($m) | $73.8 (-5%) | $82.9 (-6%) | $55.0 (-20%) | $44.0m (-5%) |
| EPS (cents) | $0.56 | $1.07 | $0.21 | $0.14 |
| DPS (cents) | $0.47 | $0.75 | $0.14 | $0.065 |
| PE (X) | 12.4 | 10.5 | 10.5 | 10.9 |
| Dividend Yield (%) | 6.8 | 6.7 | 6.7 | 4.2 |
A brief comment on the individual companies follow:
SIQ: Services 358,500 salary packaging customers, has 68,500 novated leases under management and has 695 full-time equivalent staff. Facing a decline in new motor vehicle sales and regulators forcing a change in insurance. There will likely be a negative impact from reviews by both ASIC and Treasury on add-on insurance products. While this will be somewhat mitigated by the focus on reducing a digitising its platforms, earnings growth will be difficult to come by in the foreseeable future.
MMS and ECX: Given the pressure from the new vehicle market as well as insurance and novated commissions, another bid by MMS for ECX, cannot be ruled out. In late-2018, MMS bid 0.1414 MMS plus $0.46 for each ECX share, and if successful, this would have made the merged group the leading ANZ salary packaging and fleet management company with 76,359 novated leases, a fleet of 125,751 vehicles and salary packaging for 347,909 staff. That deal was expected to be EPS accretive for MMS, prior to $50 million of in EBITDA synergies expected to be realised within three years of integration.
The recently appointed CEO for ECX, Julian Russell, has reversed many of the company’s acquisitions by selling off GraysOnline, AreYouSelling and Commercial Equipment Finance Australia in Q3 2019 and closing the New Zealand equipment finance business in Q4. Right2Drive and Car Loans is expected to be sold in Q4 2020. This retreat saw ECX’s Shareholders’ Funds decline from $868 million to $481 million over the year to 30 September 2019.
SGF: A tough earnings environment on flat revenue given the challenging Commercial sector, headwinds from the Consumer and Novated business with declining new motor vehicle sales and add-on insurance products subject to regulatory pressure. Rather than taking commissions up-front, SGF will have to book commissions over the “life of the contract” and this will weigh on earnings over the foreseeable future.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
