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Smartgroup On The Road To Acquisition?

Australia | Mar 15 2018


Brokers are anticipating an acquisition by Smartgroup, which recently raised equity.

-If no acquisition is planned why raise equity now?
-Material acquisition could likely be outside salary packaging
-Would provide fewer synergies and may require capital investment


By Eva Brocklehurst

Smartgroup ((SIQ)) has substantially expanded its footprint in salary packaging, novated leasing and fleet management over 2017. Having raised equity immediately post its February results, brokers can only speculate another acquisition could be nigh.

The company completed a $75m institutional placement priced at $11.05 a share a -5.5% discount to the February 26 closing price. The company is also undertaking a share purchase plan with potential to raise up to a further $15m.

This capital raising follows the completion of four acquisitions over the past 12 months, including AccessPay, Aspire, RACV salary solutions and Fleet West. The company has signalled the integration of these businesses is progressing well and synergies are ahead of schedule. Acquisitions are expected to contribute $18.7m in operating earnings (EBITDA) in 2018.

Credit Suisse queried the reasons behind the capital raising at the time of the announcement, not sure that the extra flexibility was worth the cost of dilution. If there is no acquisition forthcoming then why not wait, as the balance sheet is healthy? The broker hopes that an acquisition announcement will provide the answer sooner rather than later.

Funds have been applied to debt reduction and the company's gearing has dropped to around 0.5x pro forma FY17 EBITDA following the placement. Morgans expects acquisitions will feature in the next 12-18 months and, based on previous acquisition multiples and using debt capacity, estimates there is capacity to acquire around $20-30m of EBITDA.

Smartgroup has around $135m of available debt capacity under its existing facility. Morgans believes a material acquisition is likely to be outside the salary packaging segment, as only smaller businesses remain in that area. This is likely to result in fewer synergies and potentially require heighten capital investment.

Heightened Risk

The broker acknowledges that anticipating growth via acquisitions inherently increases risk but points out the company has a strong track record on execution and also delivering organic growth.

Credit Suisse agrees an acquisition in a complementary area carries more risk, and synergies will be harder to extract than via the consolidation of supplier commission and rebates in novated leasing and salary packaging.

As the novated leasing market in Australia is increasingly concentrated, CLSA expects attention will shift to adjacent vertical markets. The broker believes that management's track record is hard to fault and successful deployment of available cash should deliver material returns for shareholders.

Assuming a 15% return on the $200m the broker assesses available for investment, this would drive more than 20% in upgrades to base-case assumptions. CLSA, not one of the eight stockbrokers monitored daily on the FNArena database, upgrades the stock to Buy and raises the target to $13.65 from $12.50.

FNArena's database shows five Buy ratings and one Hold (Credit Suisse). The consensus target is $11.73, suggesting 6.6% upside to the last share price.

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