Company Overview: SG Fleet Group Limited (ASX: SGF) works in a fleet management solutions space. It offers vehicle leasing, vehicles fleet management, consumer vehicle finance, short-term hire and salary packaging services to Australia, New Zealand, and the United Kingdom.

SGF Details

Enhancing revenue through existing customers’ retention, synergy creation and diversification in product mix: The company holds a strong workforce of ~700 people worldwide and ~138,797 vehicles under management, working under various segments in the UK, NZ and Australia.

1QFY22 Updates: 

• SGF increased its substantial shareholding from 17.8% to 19.75% in Carly Holdings Ltd. (ASX:CL8), which is an online technology company to provide mobility solutions.
• One of its Directors, Robbie Blau increased its Unlisted Performance Rights and Unlisted Options by 64,186 and 723,551, respectively.
• Australia: For its 1QFY22, its Australian Corporate segment sales activity reported as high with an addition in renewals and widening of the product range. Whereas novated segment has been impacted marginally with 25 new accounts won.
• UK: The funding environment improved with increased use of DingGo by fleet customers (+2,300 monthly repair submissions).

FY21 Results Highlights:

Despite COVID-19, the company reported momentous performance during the year, owing to the corporate businesses:

• The greater penetration of the new products and services contributed towards increment in revenue per order. Where the net revenue for the group was up by ~15% Y-o-Y and reported as ~$198.2 million for FY21.
• With the growth of ~25% in new vehicles orders, the company only report ~8.6% due to the disruptions in the new car supply chains. Rest is kept for the FY22 pipeline.
• The overall fleet size reduced by ~3% in FY21 owing to main reduction in novated leases which got most affected by early terminations by employees from Airline and students (due to COVID-19). Its underlying NPAT was up by ~41.8% Y-o-Y and reported as $51.6 million.
• It closed its accounts for FY21 with the cash and cash equivalents as of 31st June 2021 at ~$231.1 million, compared to ~$111.1 million in FY20.

Growth Drivers and Catalysts: SGF is proud to have a strategic edge in the business and to benefit from it:  

• Hedging through Product Mix Diversification: The group runs different segments like corporate segment, novated leases, rental from used vehicles. During the pandemic, when the demand for novated leases fell, it was fulfilled by the corporate segment.
• Synergies with LeasePlan: The company is quite positive in anticipating the synergies to be created in the future related to products integration, customer base expansion and retention of existing customers from both companies. The deal of acquisition was signed for a cash consideration of ~$273 million.

Revenue Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 76.40% of the total shareholding, while the top 3 constitute the maximum holding. Bluefin Investments Ltd. and Gunning (Tex) are holding a maximum stake in the company at ~52.29% and ~13.04%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company has reported an improvement in gross margin performance from FY19 at 44.6% to 45.0% in FY21. Cash Cycle Days deteriorate from negative 48.5 days in FY20 to negative 41.6 days in FY21.

Liquidity Profile & Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors and their mitigations:

1. Fluctuations in Demands and Sentiments: Due to the changes in customers’ preferences and sentiments, SGF’s 1HFY21 got affected in its novated leases segments. Though the same was offset by the strong performance of the corporate segment in AU, NZ and the UK.
2. COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company can get impacted by the lockdown regulations, which might affect its sales.
3. Supply Chains and Issues in Delivery: Due to supply chain constraints, the company is unable to deliver as per the demands generated, which is ultimately growing the order pipeline and stating the lead period of 12 months in new vehicles.
4. Technology Risk: The business’ efficiency also depends on the ease its interface and technology provide to the customers and work with regular upgradation.

Outlook: As delivering the demands raised during the pandemic were a challenge to the company, its order pipeline at the end of FY21 was almost doubled. This anticipates a significant no. of spill in the orders for FY22. With the aim of penetration of new products, the company focuses on the retention of the existing customers, which is reflected by the retention levels that came out as ~100% and customers’ indulgence into multiple products.

As announced in March 2021, the acquisition of LeasePlan businesses of AU & NZ is yet to be completed. The company plans to get the synergy by:

• Expanding Customer Base by retention of LeasePlan’s customers and making them trial SGF’s products Fleetintelligence/Bookingintelligence.
• Increase in Operational Scale by cross-utilization of resources and improved customer interaction.
• Enhancement of Group’s Revenue by introducing additional recurring income products and services, and at the same time, focusing on the existing revenue mix.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of SGF is trading below its 52-weeks’ average levels of $2.147-$3.290. The stock gave a negative return of ~19.45% in the past six months and a negative return of ~7.97% in the past nine months. The stock has been valued using EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at some discount to its peers’ average multiple, considering the supply chain constraints, and COVID-19 and new variant Omicron. For the purpose of valuation, few peers like McMillan Shakespeare Limited (ASX: MMS), Eclipx Group Ltd (ASX: ECX), AMA Group Ltd (ASX: AMA) and others have been considered. Considering the expected upside in valuation & current trading levels, expected synergy created with LeasePlan, diversification through product, focus on customer expansion and their retention, optimistic long-term outlook and the key risks associated with the business, we recommend a ‘Buy’ rating on the stock at the current market price of $2.30, 11:46 AM (GMT+10), Sydney, Eastern Australia, (as on 21st December 2021).

SGF Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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