Treasure Chest: Less Uncertainty For SG Fleet

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

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Morgan Stanley

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Potential upside for SG Fleet

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The prospect of uncertain earnings for SG Fleet ((SGF)) when residual values (RVs) eventually normalise has weighed on the company’s share price over the last few years given a lack of new vehicle supply, explains Morgan Stanley.

The broker believes the narrative should now change, after record first half earnings for SG Fleet established earnings can be maintained, if not grown, even as used car prices become a headwind.

SG Fleet provides vehicle asset management services to corporate and government customers, as well as salary package vehicle leases for these customers’ employees.

Macquarie noted at the time of the first half results in mid-February operating conditions across A&NZ looked robust and favourable in the UK.

Record earnings in the first half were achieved despite a -25.8% decline in end-of-lease (EOL) vehicle risk income.

This fall in EOL income was caused by a -5.7% drop in volumes, observed Macquarie, while the average net profit per vehicle was -23% below the previous corresponding period. It's noted the average EOL selling price remains well ahead of pre-covid levels.

In a move towards a more sustainable lower level, according to Canaccord Genuity, vehicle risk now represents 21% of SG Fleet’s net income, which suggests improving quality of earnings. 

Overall, the analysts at Morgan Stanley believe fleet is one pocket within autos (and more broadly) that offers strong demand and earnings visibility ex residual value.

The analysts see structural growth upside due to increasing fleet outsourcing, lower value Lite fleet conversions (where funding is not provided but is an initial entry point to a customer) and longer-term electric vehicle fleet tailwinds.

On electric vehicles, Canaccord Genuity noted corporate adoption remains limited at present, but momentum should build over time. It’s felt SG Fleet is particularly well placed given its leading market position in A&NZ corporate fleets and a corporate-weighted mix within its Novated fleet.

First half profit for SG Fleet was 20% ahead of Macquarie’s forecast driven by net rental income, net additional products and services, as well as impetus provided by finance commissions.

Canaccord Genuity highlighted double-digit net revenue growth in the first half was largely due to a material step up in on-balance sheet funded income, a higher finance commission per unit, and agreed with Macquarie on the success of additional products and services.

This broker highlighted strong momentum for the Novated business with orders and deliveries increasing by 19% and 57%, respectively, an outcome which Macquarie felt was the key driver underneath overall earnings growth.

The fleet for the Corporate business was broadly flat on tight supply of higher volume and/or low emission vehicles, explained Canaccord, though core demand remained strong with record order and delivery levels.

Management at the company continues to expect around $15m of pre-tax synergies in FY26, further bolstering SG Fleet’s ability to fight the RV fade. To be conservative, Morgan Stanley forecasts a normalisation in RVs over the second half of FY24 along with a decline in earnings, but still considers first half actuals were a strong data point for upside.

In a pointer for investors, Morgan Stanley will be testing its positive thesis for SG Fleet by monitoring upcoming new vehicle sales data as a barometer on supply.

Canaccord Genuity has a Buy rating and $3.58 target for SG Fleet. At the time of first half when shares were trading at $2.48, the analyst felt shares were trading too cheaply and drew attention to the attractive post-tax dividend yield on offer.

For brokers covered daily by FNArena, Morgan Stanley and Macquarie have Buy ratings, or equivalent, and target prices of $3.10 and $3.21, respectively.

The $3.30 average target of all three brokers suggests around 17% upside to the $2.83 share price at the time of writing.

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