That new car feeling is still some way off for many of Smartgroup’s undoubtedly frustrated customers. The company remains a good business with strong financials but is facing a muted growth outlook.
SIQ reported FY21 EBITDA of $103 million, an 8% increase over the prior year. Net profit of $69.5 million was up 7% and was slightly ahead of market expectations. SIQ’s strong cost control boosted margins by 200bp. Revenue growth of 2.5% was driven by 4% growth in settlements and a 5% increase in packages. On-going supply constraints resulted in $12 million of revenue being carried over. The result was also constrained by a 5% reduction in yields.
Anyone who has tried to purchase a new vehicle will know the global production shortages are delaying settlement volumes. Domestic dealers are also preferencing retail channels. SIQ management are not expecting this situation to improve quickly so the gap between orders and settlements will stay wide for the rest of the calendar year.
In FY21, settlements increased 4% but were well below the 14% increase in orders, hence the carry-over of $12 million in revenue to FY22 or about 5% of group revenue. Open vehicle orders are about 4x pre-COVID levels, but conversion rates remain high at 99%.
SIQ renewed 8 contracts amongst its top 20 clients in FY21. The largest client, the Department of Defence, renewed for 5 years, inclusive of extension options.
Given the size of the volume backlog, sales growth should accelerate sharply when supply constraints ease, and we think this is an FY23f story.
Meanwhile. SIQ’s cash conversion is working well with 113% of NPATA converted to cash. The capital-light business and strong balance sheet emboldened the Board to not only declare a 19cps final dividend (fully franked) but also announce a 30cps special dividend (fully) franked bringing total dividends for FY21 to 72cps.
Investment view
SIQ management is making progress on its ‘Smart Future’ strategy and is seeing some early wins in digital leads for new leases and higher customer engagement. The strategy is targeting $15-20 million of benefits so its success is central to SIQ’s long term growth.
In the near term, sentiment may be affected by the on-going delay in settlements, but this is temporary.
We have upgraded our recommendation to Buy to reflect the robust free cashflow yield and the likelihood of further capital management. However, our preferred sector stock is Macmillan Shakespeare (MMS) which we see as cheaper and a better operator.
Risks to investment view
The level of novated leases and greater competition present earnings risks for SIQ. The execution of the ‘Smart Future’ strategy might fail to realise the targeted benefits. The gain or loss of major client contracts would also be an earnings issue.
Recommendation
We have upgraded our recommendation from Hold to Buy.
