Small Caps | Nov 20 2024
FY24 revealed ongoing strength for FleetPartners Group's novated leasing with analysts highlighting ongoing buybacks and the prospect for the FY27 return of dividends.
-FleetPartners Group achieved strong FY24 EPS growth lead by novated leasing
-A record 21% jump for new business writings
-Ongoing buybacks and prospects for a FY27 dividend
-Two brokers upgrade ratings for the shares
By Mark Woodruff
Earnings for fleet management and vehicle leasing company FleetPartners Group ((FPR)) are being supported by favourable operating conditions, helping to offset the ongoing normalisation of elevated end-of-lease (EOL) income seen during the covid period.
During the pandemic, the company benefited from exceptionally strong conditions in the used vehicle market, which significantly boosted the profitability of EOL vehicle sales.
Following this week's FY24 results, which showed 13% growth in normalised EPS (adjusted to replace elevated end-of-lease (EOL) income with pre-covid averages), two brokers in the FNArena database have upgraded their ratings to Buy or equivalent. The two others already rated the stock as such.
FleetPartners serves corporate and small fleet customers, offering vehicle fleet leasing, fleet management, and diversified financial services through its three segments: Australian Commercial, Novated, and New Zealand Commercial.
Assets under management or financed (AUMOF) is highlighted by Macquarie as the key driver of net operating income (NOI) pre-end-of-lease (EOL) and provisions, a metric used by FleetPartners' management.
Ord Minnett notes the novated leasing business continued to drive AUMOF growth, contributing to an overall strong FY24 result.
Year-on-year AUMOF growth of 11% was supported by a record 21% increase in new business writings (NBW).
In a strong second half, electric vehicles accounted for 55% of all novated leases, observes Ord Minnett. By contrast, NBW in New Zealand softened throughout FY24 due to a challenging economic environment.
Improved vehicle supply over the financial year reduced the order pipeline, explains Macquarie, and boosted NBW growth by 16 percentage points.
Citi anticipates another leg of growth for group NBW as more electric vehicles are released in the coming 12-24 months.
The NOI pre-EOL and provisions measure for FY24 came in 1% ahead of Macquarie's forecast driven by EOL, provisions and opex, while profit (NPATA) beat by 8.3%.
Management noted upside for AUMOF and NOI pre-EOL and provisions should the group maintain its strong NBW performance of around $990m per year.
Morgan Stanley forecasts FY25 NBW will likely be flat to slightly lower compared to FY24, but still accretive to AUMOF.
The strength of FleetPartners operational performance and strong NBW is yet to flow through to earnings, highlights Citi, with management highlighting around 46 months elapses before the current NBW is reflected in NOI.
Franking credits should start to accrue in FY26, which could see the return of dividends in FY27, suggests the broker.
In the meantime, Citi expects share buy-backs to continue and forecasts $52m and $50m in FY25 and FY26, respectively. A new $30m buyback was announced for the first half of FY25.
Expanding further on the group's enviable reputation for robust capital management, this broker notes 32% of the company's shares on issue have been bought back since 2021.
Normalisation of End of Lease (EOL) income
Citi anticipates FY25 will be the nadir for NOI pre EOL and provisions margins.
By that time, headwinds from excess management fees and funding commissions will have been largely absorbed, explain the analysts.
Margins will increase by 45bps over FY26-27, forecasts the broker, benefiting from both higher yielding balance sheet funding and reduced impacts from operating leases profile headwinds.
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