Expanding Novated Leasing Will Meet Future Electric Vehicle Demand

Key Takeaways

• Targeted digital transformation and enhanced services aim to boost customer acquisition, retention, and revenue from existing clients.
  
• Expanding corporate segment and focus on novated leasing, including electric vehicles, offer significant growth opportunities and efficiency.
  
• Expiring federal discounts and rising vehicle market competition may challenge Smartgroup's leasing volumes and yield amidst ongoing digital investments, affecting short-term revenue and margins.

Catalysts

Provides employee management services in Australia.

• Smartgroup's significant growth opportunity lies in increasing penetration within its existing client base, which currently includes 2 million Australians. Enhancing customer awareness, service, and digital assets could lead to increased revenue from its current clients.
  
• Targeted investments in digital transformation, such as the new smart.com.au and enhanced car leasing portal, aim to simplify client interactions and improve customer experience, potentially increasing customer acquisition and retention and positively impacting revenue.
  
• Expanding into the corporate segment, which is only 3% of current salary packaging customers but represents over 15% of total eligible employees, offers significant growth potential that could drive revenue and scale the business efficiently.
  
• The continued focus on novated leasing, including meeting increased demand for electric vehicles, improving vehicle supply chains, and enhancing service propositions, positions Smartgroup to benefit from expected growth in revenue from leasing.
  
• The company is establishing strategic partnerships and rolling out programs to enhance customer financial well-being, which should improve client retention and potentially increase net margins and earnings through value-added services and better customer satisfaction.

Smartgroup Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Smartgroup's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 24.7% today to 24.3% in 3 years time.
• Analysts expect earnings to reach A$85.4 million (and earnings per share of A$0.65) by about March 2028, up from A$75.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$74.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2028 earnings, up from 11.9x today. This future PE is greater than the current PE for the AU Professional Services industry at 16.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.69%, as per the Simply Wall St company report.

Smartgroup Future Earnings Per Share Growth

Risks

• The end of the federal government electric car discount policy after March 2025 for plug-in hybrids could reduce demand for these vehicles, potentially impacting Smartgroup's future vehicle leasing volumes and associated revenues.
  
• Current macroeconomic uncertainties and changes in consumer sentiment, including cost of living pressures, could affect demand for salary packaging and novated leasing services, which would impact revenue growth.
  
• The increased supply and manufacturer competition in the electric vehicle market, with more affordable EV models, could affect yield if Smartgroup is unable to maintain product attachment rates and manage vehicle mix effectively.
  
• A decrease in the pipeline of future revenue from $18 million in December 2023 to $12 million in December 2024 suggests potential short-term risks to revenue growth if this trend continues and pipeline does not increase.
  
• The ongoing investments in digital transformation and strategic priorities, while promising for long-term scalability and efficiency, are increasing current costs, potentially impacting net margins and earnings in the short term.

Valuation

• The analysts have a consensus price target of A$9.214 for Smartgroup based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$10.15, and the most bearish reporting a price target of just A$8.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$351.0 million, earnings will come to A$85.4 million, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 6.7%.
• Given the current share price of A$6.91, the analyst price target of A$9.21 is 25.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.