SG Fleet: From potholes to the motorway, or not?

SG Fleet (ASX:SGF) provides motor vehicle fleet management and salary packaging services in operations across Australia, New Zealand and the United Kingdom. It began operating over 30 years ago and has grown both organically and through acquisition. The ownership structure has also undergone a number of changes culminating in an ASX listing in March 2014. South African conglomerate Super Group retains a controlling interest via wholly owned investment firm Bluefin Investments.

Source: https://supergroup.co.za/our-s...

Since listing, the business has continued to grow. There have been two significant acquisitions. In 2016 they acquired another novated leasing business, nlc and then in September 2021, they acquired LeasePlan ANZ.

LeasePlan ANZ was acquired for total compensation of $387 million. The compensation consisted of both scrip and cash. $114 million was in the form of SGF stock. The cash component was funded by an $86m capital raise, $175m in debt and $12m in cash.

LeasePlan’s CEO and Chairman, Tex Gunning, joined SG Fleet’s board. LeasePlan ANZ’s previous parent company LeasePlan Corporation NV are now the second largest shareholder in the company with 13% of the issued stock.

With over 75% of SG Fleet’s shares on issue held by the top holders the amount of liquidity available is reduced.

The pandemic struck car leasing businesses particularly hard. For a period of time, people largely stopped leasing new vehicles. Lockdowns meant consumers were unable to shop for new vehicles and many vehicle manufacturers stopped or reduced production. SG Fleet are now getting back on track. If forecast EPS for 2023 is realised, it would see profitability return to around the same levels as 2019.

Sourcing enough supply of new vehicles has been very difficult over the last few years, especially the high volume popular makes. Delivery timeframes were pushed way out as a global microchip shortage and logistics supply stunted growth. They are now stabilising but yet to start improving markedly.

The lack of new vehicle supply has led to used vehicle prices reaching record levels. The drop in new car production at the start of the pandemic has now created a shortage of three year old vehicles adding further upward pressure to used car values. Used vehicles prices remain very elevated although they have come down from the peak as shown in the end of life sales price chart below. This end of life income has been a positive for SG Fleet but is likely to start to fall off as the second hand vehicle market gradually returns to a more normal state.

Source: SG Fleet, 1H23 Results Investor Presentation, 14 Feb 2023

The recent changes to fringe benefits tax for electric and low emission vehicles have made it far more attractive to lease these types of cars. Of course the supply issues remain with wait times of up to six to nine months for more popular models. This has resulted in sharp increase in EV quote requests, but supply shortages mean that whilst the order pipeline is growing, it is not yet having much impact on revenue.

After 18 months of steady decline, the share price has turned up sharply since the start of the new year. In the calendar year to date, it has risen 27%. This included a sharp spike following the release of the half year results on Monday 13 February.

Revenue growth in 1H FY23 was strong at 21.5% on pcp. This was due to new vehicle delivery volumes and higher volumes of end of lease disposals. It also included 6 months revenue from LeasePlan ANZ compared with 4 months in the pcp.

Operating expenses rose 19.7% driven by the tight labour market and investments in technology along with the additional two months of expenses from LeasePlan. Consequently underlying NPAT only rose by 8.7%. With the additional shares that were issued to fund the LeasePlan acquisition, underlying EPS only increased by 3.9%. Overall the result was quite positive as the pandemic disruptions have started to ease, leading to higher volumes.

SG Fleet is rated as a Super Stock as it scores above 70 on all three of the Quality, Value and Momentum ranks.

Despite the trevails of the last three years they have managed to maintain a return on equity figure of above 13% and their Health Trend F-score sits on 7, both of which contribute to the Quality Rank.

Of the three factors making up the StockRank, Value is the most attractive for SG Fleet with a current value of 90. This has declined over the last 30 days as the share price has rallied, but it still remains compelling. The forecast PE ratio is under 10 and the EPS growth forecast is almost 10%. The forecast dividend yield is 7% fully franked. It also looks good in terms of the EV to EBITDA ratio and the Price to Book Value ratio.

These types of businesses are subject to a lot of regulatory risk. The benefits gained from these packaging deals rely heavily on taxation laws and they can be a political football. Prior to the 2019 election the Labor party were planning to significantly curtail the benefits available under the fringe benefits tax rules if they came to power. This had a significant negative impact on the share price of SG Fleet and its listed competitors, however the changes were never implemented as Labor failed to win the election.

Most recently we have seen the changes regarding electric and low emissions vehicles which has had a positive impact, but these benefits are always at the whim of government policies.

Overall there is a lot to like about SG Fleet, but investors need to be cognisant of the risks. These include potential changes to government policies, interest rate changes and the fact it is a very competitive industry. The dividend income tends to be fairly steady, aside from the COVID induced dip, but the share price over the last 10 years has fluctuated considerably and is yet to show consistent growth.

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