SG Fleet Drives Growth Potential In UK

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

SG Fleet has raised its profile in the UK with the acquisition of a fleet business, expected to provide a platform for further growth.

-Adds scale and profitability to SG Fleet's existing UK product
-Significant synergies from integration and larger client base
-Risks continue to lie with any regulatory changes

By Eva Brocklehurst

Fleet management and novated leasing business SG Fleet ((SGF)) has added value and increased its profile in the UK with the purchase of a fleet business, which brokers believe should provide a platform for further growth.

The company has acquired UK contract hire and short-term rental and fleet management service, Fleet Hire, for an enterprise value of GBP25.7m. The company expects the acquisition to be accretive by 4.5% in the first full year of ownership. Fleet Hire manages around 6,500 vehicles, which adds to the company’s current 100,000 vehicle fleet.

Macquarie likes the deal, as settlement is immediate and SG Fleet will receive 11 months of earnings in FY17. Meanwhile, the company is continuing to benefit from a trend in outsourcing and has a multi-level growth strategy the broker likes. Citi also welcomes the acquisition, noting the further potential on offer in an under-penetrated UK market.

Morgan Stanley observes SG Fleet has been operating in the UK for 10 years with its Novalease salary sacrifice product, but lacked scale and was not yet profitable. This acquisition provides the means to address the situation, with a full product suite in fleet management, salary packaging and short-term leasing. The existing management team has been retained.

The broker expects synergies to come from integrating premises, systems and platforms and with procurement advantages. Short-term rental for corporates is a high-growth segment in the UK which the broker observes will continue to be pushed to clients.  Short-term rentals should provide protection in case of an economic downturn as corporates can use these rentals where long-term leases are harder to justify.

Morgan Stanley’s bull case incorporates further upside from state government outsourcing and greater realisation of synergies from the acquisition. Moreover, there are special dividend opportunities in being debt free. The risks lie with any adverse regulatory decisions, such as FBT (fringe benefit tax) changes and changes to import barriers, or an impact on finance or insurance commissions via increased regulation.

The acquisition should accelerate near-term growth prospects for the company’s salary sacrifice leasing in the UK and be underpinned by a much larger corporate client base, Goldman Sachs contends. This should also boost credibility when tendering for larger clients. Goldman Sachs, not one of the eight brokers monitored daily on the FNArena  database, has a Neutral rating and $4.32 target.

Along with the acquisition, the company has also revealed profit expectations for FY16 of around $51.2m. This is above most estimates and Morgan Stanley, in reflecting the update and the acquisition of Fleet Hire, raises its earnings estimates by 1.8% for FY16 and 6.1% for FY17.

The broker expects normalised earnings growth of 30.5% in FY17 and 11.9% in FY18 and maintains there is further opportunity for accretive acquisitions in both Australia and the UK, adding up to an attractive proposition.

Catalysts include further government fleet mandates, used vehicle prices and new car sales and further penetration of fleet and novated leasing products in car pools. Novated leasing is common in Australia, enabling a business to lease a vehicle for an employee with lease payments then made from pre-tax income.

FNArena’s database shows three Buy ratings for SG Fleet with a consensus target of $4.42, suggesting 1.1% downside to the last share price. This compares with $3.99 ahead of the update. Targets range from $4.07 (Citi) to $4.60 (Morgan Stanley).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms