FleetPartners Green Outlook Is Electrifying

Small Caps | May 15 2024


Following a strong run over the last year, brokers see further upside for shares of FleetPartners following first half results.

-Analysts raise targets for FleetPartners after first half results
-High used car prices drive higher end-of-lease income
-Margins disappoint, but Citi expects a rebound
-Tailwind from electric vehicle uptake


By Mark Woodruff

In a world striding towards electrification, FleetPartners ((FPR)) is finding a niche with a strategic focus on electric vehicles and a new green bond initiative.

After a powerful run from $2.08 a year ago to recent highs of $3.84, the company’s share price retraced around -9% since delivering first half results earlier this week, despite two covering brokers in the FNArena database setting materially higher 12-month targets.

Morgan Stanley insists valuation multiples for the company remain undemanding when one contemplates the strong trajectory for new business writings (NBW) amidst resilient fleet demand, elevated backlogs, and supply improvements.

Acting as catalyst for higher outsourcing, fleet electric vehicles (EV’s) are an emerging tailwind globally. For FleetPartners, electric vehicles now comprise 51% of Novated new business writings (NBW), hitting a high of 63% in March this year.

FleetPartners provides vehicle fleet leasing, fleet management, and diversified financial services. The Australian commercial segment provides vehicle fleet leasing and management, along with commercial equipment finance and leasing.

Novated leasing and salary packaging is supplied via the Novated segment, while the New Zealand Commercial division specialises in fleet leasing and management and operates under the trading names of fleetPlus and fleetPartners.

Impressively, year-on-year growth for NBW and assets under management or financed (AUMOF) jumped by 39% and 10%, respectively, in the first half.

Also, profit exceeded Macquarie’s forecast by 12% as ongoing high used car prices drove higher end-of-lease (EOL) income, exceeding the consensus estimate by 28%.

In a short-term setback, according to the broker, lower margins weighed on net operating earnings (NOI) -pre EOL and provisions- which only increased by 1% year-on-year.

These lower margins were partly due to a mix-shift to Novated (a lower margin than Fleet) and the timing of profitability on new operating leases, explains the analyst. Also, Novated insurance commissions are weighted to the second half, and income is generated over the lease term for the higher proportion of NBW.

A rebound for margins?

While Morgan Stanley concedes the consensus forecast for second half NOI pre-EOL will likely be lowered, this broker makes a case that $81.5m can be earned for the period, higher than the $76.1m achieved in the first half.

Morgan Stanley analysts expect not only ongoing NBW strength, but also some catch-up in H2 from second half FY23 operating lease profits. Strong Australian asset backed securitisation (ABS) issuance is also expected with a $1m benefit into and from the second half.

As announced in early-May, management successfully priced a $400m ABS, which is backed by Australian operating, finance and novated finance lease receivables originated by FleetPartners.

The company is expected to be the first fleet management organisation to issue a green ABS tranche under the International Capital Markets Association Green Bond Principles.

This green tranche will exclusively fund leases for electric vehicles and has been certified as a “Climate Bond” by the Climate Bonds Initiative, which is accepted globally as the leading certifier of green bonds.

The order pipeline

The outlook for NBW, explains Macquarie, is supported by the order pipeline, which remains elevated relative to history.

At the end of March, the Novated order pipeline was 3.8x times pre-pandemic levels, which is still down from the lofty 4.6x times of last-September during onerous supply constraints.

Fleet New Zealand provided a relative weak spot, highlights Macquarie, with NBW up by 8% compared to the 31% for Fleet Australia.

While NBW for Fleet Australia and Novated in the first half fell short of forecasts, Citi attributes this outcome to a seasonally softer January month.

This broker believes order activity has remained robust and FleetPartner’s healthy order pipeline will support AUMOF growth.

On the capital management front, the company announced a $27m share buyback for the second half, making the cumulative buyback more than $200m, which Macquarie points out is approaching -30% of issued shares cancelled since May 2021.

The average target price for FleetPartners of four covering brokers in the FNArena database rose to $3.68 from $3.35 following the first half results, suggesting 9%-plus upside to the latest share price.

Ord Minnett (Buy; $3.00 target), one of the four brokers, is yet to refresh following the result release.

Macquarie downgraded its rating to Neutral from Outperform after the recent share price rally, while Citi and Morgan Stanley have recommendations of Buy and Overweight, respectively.

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