Treasure Chest: Upside For Salary Packaging Sector?

This story features SMARTGROUP CORPORATION LIMITED, and other companies. For more info SHARE ANALYSIS: SIQ

By Eva Brocklehurst

Does reduced regulatory risk support a re-rating for SmartGroup ((SIQ)) or McMillan Shakespeare ((MMS))? A recent statement from the Labor Party in support of the fringe benefit tax (FBT) rules suggests to Credit Suisse that the risk of regulatory changes is abating, given bipartisan support for the sector. Other brokers also believe the risk is diminished.

Meanwhile, both SmartGroup and McMillan Shakespeare have been retained for the salary packaging component of the Queensland government's contract. In the case of McMillan Shakespeare, Morgan Stanley considers this is a material revenue pool and confirmation of the contract retention also lowers the risk profile.

The largest part of the contract, the novated lease panel, is up for tender and several brokers believe success in this regard would be a positive driver of either company's share price. Conversely, a failure to be on the new panel would also be regarded as a negative risk to the stocks. A decision is expected this month. A novated lease is a vehicle lease agreement whereby the employer agrees to pay the lease payments out of pre-tax salary.

McMillan Shakespeare has recently re-rated on the back of lower regulatory risk and Credit Suisse believes it still offers further strong earnings momentum. Progress on the integration of Presidian and UFS is continuing and should be an earnings driver for that division.

Credit Suisse expects a similar second half for Australian asset management and continued growth in the UK business. Modest positive increases in margin assumptions and lower forecast interest rates complete the picture.

On FNArena's database there are four Buy ratings for McMillan Shakespeare. The consensus target is $15.62, signalling 3.3% upside to the last share price. Targets range from $14.79 (Morgan Stanley) to $16.25 (Credit Suisse).

SmartGroup is in an upgrade cycle, Credit Suisse contends, with consensus estimates failing to capture the combination of margin expansion and accretion from the Advantage acquisition. The broker reviews its previous forecasts and concludes that it has inadequately captured the flow through of higher second half margins to future years.

Moreover, given margin expansion has been driven by improvements in the structure of supplier commissions and rebates, the broker suggests the material increase is sustainable. SmartGroup has also made some recent gains in the corporate space as well, the most significant being appointment to the novated leasing panel for Westpac.

The database has four Buy ratings and one Hold (Ord Minnett) for SmartGroup with a consensus target of $5.35, suggesting 8.6% in downside to the last share price. Targets range from $4.94 (Ord Minnett) to $6.10 (Credit Suisse).
 

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