Chance To Add Scale Abounds For SG Fleet

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

Vehicle leasing and fleet management service, SG Fleet, expects to maintain strong momentum in its core business while actively pursuing further acquisitions.

-Gains substantial contract from NSW government
-Synergies still be be gained from recent acquisitions
-Opportunities abound in fragmented UK market
 

By Eva Brocklehurst

Vehicle leasing and fleet management service, SG Fleet ((SGF)), expects to sustain momentum in its core business while pursuing further acquisitions. FY16 results were in line with expectations, being pre-announced with the recent Fleet Hire acquisition.

The company observes business activity is picking up in Australia and the UK business is stabilising. Brokers welcome the strong result, delivered while business sentiment remains cautious and increased competition is exerting pressure on margins.

Excluding the seven months contribution from NLC, Citi estimates Australian revenue grew more than 3% while New Zealand achieved a maiden full year profit. The UK continues to be loss-making. The company is also expected to realise $6-8m in synergies from the NLC business over the three years.

Three were some disruptions in the second half from the long lead-up to the federal election but a contract with Westpac was signed at the end of the financial year and other potential wins have been pushed into FY17.

The company has now gained a substantial contract from the NSW government, winning 95% of the state fleet, has indicated the tender pipeline remains considerable, and is confident it can leverage its success with the NSW win.

Citi is watching out for more acquisitions, given the company’s appetite for growth and the fact it is actively exploring options. The broker estimates the company could fully fund a $155m acquisition via debt, observing the recent NLC acquisition cost $154m and materially transforms the company’s financials.

With a largely fixed cost base in the leasing business, scale benefits from such M&A could be meaningful, the broker contends, notwithstanding the fact the same situation exists for competitors and an acquisition of considerable scale may be contested. The broker envisages either the UK or Australia is the most likely geographic sector where a deal could be done.

Citi also observes that increased exposure to the UK via the Fleet Hire acquisition has coincided with the UK government undertaking an analysis of the cost of salary sacrifice benefits. The government intends to implement the outcome of its consultation in the market in April 2017. However, the focus is not just on cars but a wide range of benefits included in salary sacrifice.

The UK represents around 12% of revenue for SG Fleet in FY17, not currently a major driver but one which Citi suspects, with the UK salary sacrifice segment being highly fragmented, is likely to increase in importance for SG Fleet over time.

Macquarie expects earnings to grow around 33% in FY17, driven by the contribution from NLC, Fleet Hire and the NSW government contract. SG Fleet now has 130,964 vehicles under management, up 45% on FY15 levels.

The broker estimates there was only 0.2% growth in the corporate fleet in FY16, which masks a 2% fall in the managed fleet offset by a 3% gain in the operating lease fleet. This demonstrates that the company has been successful in cross-selling products to existing customers even in a relatively flat year. NSW could be a long term growth driver, Macquarie contends, should SG Fleet be able to sell additional products over the medium term.

Macquarie also notes electric vehicles are being supplied to NZ customers and the take up of products such as telematics is generating benefits for customers and leading to additional revenue sources.

Morgan Stanley finds synergies are still to be gained from recent acquisitions and, in the UK, there are many small opportunities that should provide scale in that country. Meanwhile, the main risk from potential changes to fringe benefit tax regulation in Australia remains low in the near term.

There are three Buy ratings on FNArena’s database with a consensus target of $4.78 that suggests 3.2% upside to the last share price.

See also, SG Fleet Drives Growth Potential In UK on August 8 2016.
 

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