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Smartgroup Dashes Offer To Focus On Growth

Small Caps | Oct 26 2021


The replacement of a stellar offer with a more circumspect price has caused Smartgroup to give the bidder the flick, and the focus is now on growing the business

-No reason provided why the initial price offered for Smartgroup was lowered
-Lockdowns have likely affected orders through August-October
-Potential for capital management in the absence of acquisitions

By Eva Brocklehurst

Smartgroup Corp ((SIQ)), which offers salary packaging, fleet management and novated leasing, is back to business after the consortium that raised an indicative proposal in September withdrew the price.

Originally, the consortium comprising TPG Global and Potentia Capital offered $10.35 a share. This offer has subsequently been withdrawn, with the consortium expressing an interest to proceed at $9.25 a share.

No reason was given as to why the initial proposal was revised lower, after the consortium took over 2.5 weeks of due diligence. The Smartgroup board declined to accept the lesser proposal and discussions have now ceased.

Ord Minnett finds the implications slightly negative but points out the initial bid was "indicative".

Morgan Stanley believes the revised offer still reflected investor appreciation of the business model, such as the fact it is light on capital requirements and generates cash, amid low gearing. Further industry consolidation was also likely to be implicated in the assessment.

The broker assesses the mid-teen multiple of 16.6x 2022 price/earnings on the revised offer is more in line with recent history, versus an historically high multiple implied at the $10.35 offer.

Meanwhile, the company has signalled it is on track to provide a 2021 financial performance that is in line with consensus, which is around $68.5m in net profit and, Morgans ascertains, implies slight growth half on half.

Vehicle delivery was problematic in the first half and the broker suspects this has continued throughout the second half of 2021. The company signalled in August that orders from July were above pre-pandemic levels, although lockdowns likely affected orders throughout August to October.

Beyond that, Credit Suisse believes, when new vehicle supply normalises, a recovery in earnings growth is on the cards. The broker's valuation, now takeover discussions have ceased, reverts back to fundamentals and the rating is upgraded to Outperform from Neutral.

Macquarie has previously calculated that, as supply constraints normalise, demand could amount to 18,500 novated vehicles per year for 18 months from the second half of 2022.

Morgans, too, resumes an Add rating from Hold, noting earnings have been resilient and incremental growth should emerge from 2022. Net cash is expected by December 2021 which will allow for capital management in the absence of acquisitions.

A special dividend of 14.5c would top up the pay-out to 100%, equating to a 6.2% yield. The broker points out the recent salary packaging contract with the Queensland government has been tendered, with Smartgroup one of the incumbents. This top tier contract expires in March.

Still, contract renewal risk is perpetual, Morgans acknowledges, and there is a strong track record of Smartgroup retaining clients. The growth profile for the short term is relatively subdued but the broker notes the revenue position remains sustainable.

FNArena's database has three Buy ratings and two Hold for Smartgroup. The consensus target is $8.63, signalling 8.0% upside to the last share price. This compares with $9.23 ahead of the initial offer being withdrawn. The dividend yield on 2021 and 2022 forecasts is 5.0%.

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