Company Reports

No-moat Smartgroup’s first-half 2024 results slightly exceeded expectations, with underlying net profit after tax and acquisition amortization and EBITDA growing by 16% and 20%, respectively, from the previous corresponding period. The compression in EBITDA margins to 38% from 40% in the PCP was anticipated, as it includes investment to service a large contract win from McMillan Shakespeare, which commenced June 30, 2024. Excluding these investments, EBITDA margins would have been flat. We maintain our fair value estimate of AUD 8.30 per share, with shares close to fairly valued at current prices.

Smartgroup provides employee management services, with salary packaging, novated leasing, fleet management, and software solutions the key offerings. Together with McMillan Shakespeare, it is an oligopoly in Australia’s salary packaging market, and has a sizable presence in the novated leasing market. Entities in the government, healthcare, not-for-profit, and education industries make up 97% of Smartgroup’s client base. These industries are defensive, typically comprise of low to middle class workers, and have favorable fringe benefits tax exemptions. They are regular users of Smartgroup’s services, and underpin the firm's steady revenue.

Smartgroup provides employee management services, with salary packaging, novated leasing, fleet management, and software solutions the key offerings. Together with McMillan Shakespeare, it is an oligopoly in Australia’s salary packaging market, and has a sizable presence in the novated leasing market. Entities in the government, healthcare, not-for-profit, and education industries make up 97% of Smartgroup’s client base. These industries are defensive, typically comprise of low to middle class workers, and have favorable fringe benefits tax exemptions. They are regular users of Smartgroup’s services, and underpin the firm's steady revenue.

Since August 2023, we have believed that the market was underestimating no-moat Smartgroup’s labor intensity while overestimating its ability to grow novated leasing yields—mainly transactional revenue from facilitating novated leases for employees.

No-moat Smartgroup’s underlying 2023 net profit after tax is slightly stronger than we expected, up 7% to AUD 63 million. This is despite margins being much weaker than we expected. Stronger revenue growth of 12% was held back by cost pressures, notably wage inflation, slow vehicle delivery times, and technology spending. Group EBITDA margin declined to 39% from 42%, contrasting with our expectation for margin expansion.

Smartgroup provides employee management services, with salary packaging, novated leasing, fleet management, and software solutions the key offerings. Together with McMillan Shakespeare, it is an oligopoly in Australia’s salary packaging market, and has a sizable presence in the novated leasing market. Entities in the government, healthcare, not-for-profit, and education industries make up 97% of Smartgroup’s client base. These industries are defensive, typically comprise of low to middle class workers, and have favorable fringe benefits tax, or FBT, exemptions. They are regular users of Smartgroup’s services, and underpin the firm's steady revenue.

Smartgroup provides employee management services, with salary packaging, novated leasing, fleet management, and software solutions the key offerings. Together with McMillan Shakespeare, it is an oligopoly in Australia’s salary packaging market, and has a sizable presence in the novated leasing market. Entities in the government, healthcare, not-for-profit, and education industries make up 97% of Smartgroup’s client base. These industries are defensive, typically comprise of low to middle class workers, and have favorable fringe benefits tax, or FBT, exemptions. They are regular users of Smartgroup’s services, and underpin the firm's steady revenue.

We lift our fair value estimate for no-moat Smartgroup to AUD 8.30 per share from AUD 7.90, largely due to increased salary packaging and novated leasing volumes. This reflects a contract win from the South Australia, or SA, government—previously serviced by Smartgroup’s competitor McMillan Shakespeare, and strong growth in novated leasing volumes that prompted an upward revision in its earnings guidance for 2023.

We lift our fair value estimate for shares in no-moat Smartgroup to AUD 7.90 per share, from AUD 7.50, largely reflecting the time value of money. Shares screen as overvalued at current prices. Our forecasts assume revenue and underlying EPS growing at around 5% and 6% per year, respectively, over the five years to 2027. We expect earnings growth will be driven by a rebound in vehicle supply, which supports increased novated leasing and fleet management volumes. Margins should improve as volumes recover, the level of product takeup grows, and more client engagement via digital portals—rather than support staff. Regardless, these positive factors appear to be fully priced into the stock.

Smartgroup provides employee management services, with salary packaging, novated leasing, fleet management, and software solutions the key offerings. Together with McMillan Shakespeare, it is an oligopoly in Australia’s salary packaging market, and has a sizable presence in the novated leasing market. Entities in the government, healthcare, not-for-profit, and education industries make up 97% of Smartgroup’s client base. These industries are defensive, typically comprise of low to middle class workers, and have favorable fringe benefits tax, or FBT, exemptions. They are regular users of Smartgroup’s services, and underpin the firm's steady revenue.