Strong Outlook For Leasing, Salary Packaging Sector

This story features MCMILLAN SHAKESPEARE LIMITED, and other companies. For more info SHARE ANALYSIS: MMS

-Strong sector returns
-Expansion opportunities
-Residual legislative risk
 

By Eva Brocklehurst

There are now several stocks offering a combination of vehicle leasing, salary packaging and fleet management services listed on ASX. Two years ago there was pretty much just McMillan Shakespeare ((MMS)), which became caught up in the then federal government’s proposed legislative changes, subsequently rescinded by the incoming government.

Although concerns about hastily contrived legislation have largely dissipated, brokers retain a heightened awareness of the key vulnerability of such stocks, given this contributed to McMillan Shakespeare’s share price plunging around 50%.

This concern is particularly in regard to the Fringe Benefits Tax, which was the subject of the 2013 debacle, but UBS also flags a risk around potential modification to the Australian Prudential Regulation Authority’s capital rule on warehousing. Nevertheless, there are strong returns across the sector on offer and Macquarie is the latest broker to initiate coverage of two more stocks.

SG Fleet ((SGF)) offers salary packaging and fleet management, operating in Australia, New Zealand and the UK. Vehicles are financed off balance sheet under principal and agency style agreements. The company has a spread across industries and a multi-pronged growth strategy. Macquarie expects the company’s strategy should lead to earnings growth of near 10% in FY16, a target management underscored at the company’s result release.

Macquarie has initiated with an Outperform rating and $2.92 target. On FNArena’s database this now complements Citi, which has a Buy rating and $3.02 target, and Morgan Stanley, which recently downgraded to Equal-weight from Overweight with a $2.75 target. SG Fleet’s FY15 result was ahead of prospectus forecasts. The reason Morgan Stanley downgraded was valuation, with the strong outlook now reflected in the share price.

A stable mate, Eclipx Group ((ECX)) listed in April. The company is a diverse operator, with its foundation business, FleetPartners, founded in 1987 as the vehicle leasing arm of Esanda Finance. The company’s outlook has improved substantially over the past year, with Macquarie noting new management installed in January 2014 appearing to have turned around a previously stagnant business.

The company aims to renew and improve its vehicle offering and expand into commercial equipment finance. Eclipx funds on-balance sheet leases through a combination of warehouse facilities, asset-backed securities and corporate debt and cash. There are four Buy ratings for Eclipx on FNArena’s database, with a consensus target of $3.27, suggesting 6.1% upside to the last share price.

McMillan Shakespeare has been a mainstay stock for the industry on ASX for some time. The company has pleased brokers in the wake of the FBT issue by diversifying its business base and reducing its reliance on FBT-linked packages.

Macquarie uses this stock to obtain a valuation range for SG Fleet of 15-16 times FY16 profit estimates and for Eclipx of 14-15 times FY16 estimates. The broker points out that McMillan Shakespeare retains an on-balance sheet lease book, as does Eclipx, while SG Fleet does not.

There are three Buy ratings for McMillan Shakespeare on the database. The consensus target is $15.09, suggesting 17.0% upside to the last share price. The dividend yield on FY16 is 4.7% and FY17 it is 5.0%.

Smartgroup Corp ((SIQ)), a fourth player in the sector, also maintains its lease book off balance sheet offering salary packaging and some fleet management. It has a salary packaging contract with the Department of Defence, its largest revenue contributor. Morgans expects its appointment to the Australian Bureau of Statistics and CSIRO provider panels should enable further contract wins in FY16.

First half results were quite strong, driven by top line growth and margin expansion. Macquarie expects FY16 revenue growth around 17.5%. There are two brokers covering the stock on FNArena’s database. Morgans has a $2.95 target and Add rating and Macquarie a $2.82 target with Outperform.
 

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