SG Fleet Well Positioned For Growth

This story features SG FLEET GROUP LIMITED. For more info SHARE ANALYSIS: SGF

-Low level of outsourcing in Australia
-Could beat prospectus forecasts
-Diversification opportunities abound
 

By Eva Brocklehurst

SG Fleet ((SGF)) is well placed in its field as a specialist provider of vehicle leasing and fleet management. Citi believes there is scope for the company's superior technology to capitalise on growth opportunities and initiates coverage with a Buy rating and $2.79 target.

The main areas of growth are reflected in the trend to outsource fleet management. There is a low penetration of this service in Australia, Citi observes. The percentage is around 36% locally versus other mature markets such as the United Kingdom where outsourcing is around 76%. This reveals an opportunity for SG Fleet to grow with or without acquisitions.

After attending a demonstration of the company's technology, Citi is impressed with the prospect of deploying these solutions to capitalise on its position in a fragmented industry. Nevertheless, there are concerns about whether the company can hold its lead versus larger international operators such as LeasePlan or Element Financial, which have economies of scale. Of note, the tender process that large corporate and government customers follow and the 3-5 year tenure of such contracts does mitigate some of the potential for competitive churn.

SG Fleet has a net cash position which also provides room for bolt-on acquisitions. The stock is currently trading on a FY16 price/earnings ratio of 13.5, considered relatively cheap at around an 11% discount to estimates for the Small Industrials grouping on ASX. At Citi's target price the stock would be trading on a FY16 PE ratio of 15.4. Citi also observes potential to move into adjacent markets such as commercial equipment leasing or salary packaging administration as well as new geographies. Still, the broker is mindful that while management is intent on building up its core offering, such forays into other markets are unlikely over the short to medium term.

The downside risks include the fact that Element Financial, with its acquisition of Custom Fleet, is now more a competitor than a partner to the company. Moreover, lingering issues with fringe benefits tax legislation in Australia could impact demand for novated leases, which in turn may affect the company's salary packaging business, around 27% of its fleet management. Citi notes fleet management and leasing is a mature but competitive and fragmented industry. The upside risk involves SG Fleet winning large outsourcing contracts should government outsourcing gain pace.

Morgan Stanley is also of the opinion the company may be on the way to bettering prospectus forecasts, even though the environment is challenging. The broker has set an Overweight rating and $2.25 target and believes the stock offers a long-term growth story. The company intends to pay both interim and final dividends. Morgan Stanley forecasts 11c in total for FY15 and Citi is expecting 10.5c, implying a yield of 4.4%.

In addition to Australia, SG Fleet offers fleet management in New Zealand and the UK as well as salary packaging services in the UK. The company uses principal and agency arrangements with third parties to fund vehicles. These funds providers pay a financing commission for originating the lease. While the company has a panel of ten providers a majority of the funding is provided by just two. This model means SG Fleet has limited credit risk and low capital requirements to grow the fleet. One unique aspect of the company's operations is its in-house vehicle disposal team, which operates five warehouses in Australia. Competitors usually sell cars via third party auction houses.
 

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