The loss of a top 20 contract for Smartgroup is unfortunate and is a reminder that even long term clients can move on. SIQ has retained most of its top contracts this year and faces more renewals in CY23f. The company is fundamentally sound, despite the fall in its share price, and we have retained our Buy recommendation.
The Victorian Department of Education and Training has ended its 19- year association with SIQ and moved its contract to MMS. SIQ said the loss will have a less than 5% impact on revenue in CY23, but the EBITDA impact will be more severe.
SIQ has a number of top 20 contracts up for renewal in CY23. The loss of the DET contract will heighten the importance of retaining the renewals as they occur.
SIQ confirmed that 1H22 revenue and EBITDA will be in line with the same period last year. Consensus forecasts are implying that SIQ will need to deliver revenue and EBITDA growth of 9% and 13% in 2H22f respectively, which is beginning to look optimistic.
Investment view
The share price has fallen about 20% since the start of the year on concerns over rising interest rates and a more circumspect economy. But we remind readers of the defensive nature of SIQ’s business with a customer base mostly exposed to lower risk public sector employers. In FY21, for example, SIQ renewed its contract with the Department of Defence for a further 5 years among 8 of its top 20 customers. The tendering process is clearly competitive, and SIQ is likely to up its game when contract renewals arise. There may be other new contracts to be won to offset the DET loss.
SIQ has positive cash flow and yield characteristics that underpin the defensive nature of its business.
Supply constraints should be easing through CY23 and SIQ’s Smart Future strategy will also be kicking some digital goals by then. The strategy is targeting $15-20 million of benefits.
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 retained our Buy recommendation.
