Smartgroup is a specialist provider of salary packaging, novated leasing, fleet management, share plan administration and workforce management services.
Following its recently announced acquisition of the RACV Salary Solutions and Aspire Benefits businesses, Smartgroup will have about 306,500 salary packaged employee customers and 61,000 managed novated car leases. Smartgroup was established in 1999 as smartsalary.com and was listed on the ASX in July 2014. It now has a market capitalisation of about $1.14 billion.
We have initiated coverage of Smartgroup with an Accumulate recommendation and a target price of $9.60, based on a blend of our discounted-cash-flow and PE multiples valuations.
We view Smartgroup as an attractive business for the following key reasons:
- It is a market leader in its core offerings of salary packaging and novated leasing, having added around 12,000–14,00 salary packages and 1,500–3,000 novated leases per annum over the past three years.
- It has a successful track record of tenders, including a tender win rate of 40% between September 2007 and July 2014.
- Since its initial public offering, Smartgroup has undertaken eight acquisitions, which have seen it spread its offering into new employee segments, such as the rebatable sector (used in non-profit enterprises where employees can salary package non-cash benefits).
- Off-balance-sheet funding of the 61,000 novated leases means the capital requirements of this business remain modest and the company takes on no residual risk.
- Cash conversion is good, with CY16 operating cash flow representing about 103% of net profit and a similar number in CY15.
- Smartgroup has a strong management team, with chief executive officer Deven Billimoria having spent 17 years and chief financial officer Tim Looi eight years at the company. Throughout their tenure the organisation has consistently delivered strong organic growth, while making significant acquisitions.
In the medium term, we believe Smartgroup’s earnings will be driven by solid organic growth, based on our mapping of the salary packaging and novated leasing markets across state and federal government departments and universities, with a focus on opportunities in the healthcare sector.
We estimate nearly 40% of the salary packaging market is internally managed, implying a large potential opportunity. We anticipate organic growth will come about primarily in two ways: 1) winning new tenders; and 2) an increase in penetration into existing employer clients’ workforces.