Smartgroup shares up over 7 percent on South Australian government contract win

About Smartgroup

Smartgroup Corporation Limited (Smartgroup, the Group, ASX:SIQ) is a specialist provider of outsourced employee management services including salary packaging (known as salary sacrifice), novated leasing and fleet management, payroll administration and workforce optimisation solutions. Services are provided to employees of State and Federal Government departments, Charitable organisations, and corporate employers. The Group commenced in 2001 as Smartsalary Pty Limited and listed on the ASX in July 2014.

Ten-year contract to exclusively service 110,000 government employees

Smartgroup has been awarded a 10-year salary packaging and novated leasing services contract by the South Australian government, commencing on 1 July 2024. The salary packing services are available to 110,000 South Australian government employees and allow Smartgroup to exclusively manage a panel of third-party novated leasing providers or financiers.

The competitive tender process has stamped Smartgroup as a market leader in salary packaging, a position it plans to further strengthen in Adelaide by making investments in sales, customer education and customer service roles in preparation for the contract commencement. Given these investments, Smartgroup does not anticipate a meaningful earnings uplift from this contract in 2024.

Positive trading update

Smartgroup expects to report a Net Profit After Tax for the full year ending 31 December 2023 of approximately $63 million, on estimated revenue of $249 million. Higher novated leasing volumes are driving the revenue uplift as electric vehicle (EV) demand continues to accelerate since late 2022. EVs now account for over 40 percent of total Smartgroup new car lease orders, which are up 60 percent from the first half year of 2023.

The 2023 NPAT forecast includes higher product, staff and technology costs that have followed investment to support future growth, as well as wage increases and general inflation.

Outlook

Smartgroup is a capital light business that increasingly relies on technology to deliver its services. The recently launched Car Leasing Portal which enables customers to obtain quotes and process credit applications 24/7/365 is progressively being rolled out to the bulk of clients.

The abolishment of Fringe Benefits Tax on many new EVs in November 2022 continues to drive demand for EVs, especially from government clients. New EVs coming onto the market at lower price points within the medium term are expected to drive further novated leasing demand. The easing of new vehicle supply constraints is beginning to unlock the new vehicle order pipeline built up over the past year or more.

These positively trending supply and demand factors combined with Smartgroup’s 101 percent NPAT to operating cash conversion ratio, and modest net debt amount of approximately $40 million, point to positive shareholder returns at least over the medium term.