Thursday, August 8th, 2019
In recent weeks, the Clime Investment Management team has focused on updating our shortlists of potential investments. This is an integral part of the Clime investment process and a useful discipline for all investors. Key benefits of this process include:
- Building a shortlist forces investors to examine new companies. It is only through analysing large numbers of companies that we are able to identify those companies which stand out from the rest as offering both high quality businesses and valuation upside.
- Examining different businesses informs our view about the overall market and the existing stocks in the portfolio. For example, some of these businesses operate in similar industries or have similar exposures e.g. to the Australian consumer. Moreover, it forces one to think critically about the risk/return characteristics of existing holdings relative to potential investments.
- The process facilitates overarching portfolio management. Portfolio managers can direct work designed to add specific qualities to the portfolio e.g. to add defensiveness or yield or conversely to increase exposure to cyclical companies as the case may be.
- The timing of this most recent refresh was set to align with the upcoming August reporting season. This provides the analyst team with areas of focus heading into the avalanche of new information coming the market’s way.
One of the companies on the mid-caps shortlist is SmartGroup (SIQ), which operates in the salary packaging / novated leasing industry. SIQ primarily services public health and not-for-profits who can access the tax benefits of salary packaging. Salary packaging involves an employer paying part of an employee’s salary towards approved areas of spending pre-tax. The most profitable part of the business is novated leasing, which is a salary packaged car lease.
SIQ scores highly on Clime’s quality framework; achieving high returns on capital; including an ROE of 24%; high margins, including an EBIT margin of 38%, and with conservative gearing of 0.5x net debt / EBITDA.
SIQ’s share price has come under pressure over the past twelve months in the context of falling new car sales, as illustrated below. The stock is now trading on a forward PE of 14.0x, compared to a three year average of 16.0x, offering a fully franked dividend yield of 5.2%. Management indicated at the AGM in early May that the company has been able to maintain the volume of novated leases through CY2019 to date. This could represent a value opportunity, so Clime has added it to our shortlist and will be doing more work on the company through reporting season.
Figure 1. SIQ one-year share price chart
Figure 2. SIQ three-year PE history