As you know, Australians and UK employees and employers can benefit from a legal tax loophole known as salary packaging. In effect salary packaging allows employees to deduct the costs of certain goods and services from their salary before the tax bite comes; thus lowering taxable income. This is an attractive win/win for both parties. Employers reduce salaries and employees reduce taxes. This works best for organizations, largely non-profit, that are exempt from paying taxes on fringe benefits given to employees (FBT) paid by for-profit companies.
In 2004 McMillan Shakespeare (MMS) became the first company offering salary packaging services to rebatable organizations (exempt from the FBT) for their employees. The adjusted closing stock price at the end of its first day of trading was $0.24 after an IPO issue price of $0.50. By 12 July of 2013 the stock price was at an all-time high around $17.50 when the bottom dropped out. The government was considering substantial changes to the FBT exemptions, making salary packaging a costly endeavor for employers. The changes never materialised and the stock has recovered, but has yet to match the all-time high. Here is a price performance chart for MMS.
The price performance over the trading history of the stock is monumental along with a respectable 40% improvement over the past five years.
Navigating the tax exemption limits and the “do’s and don’ts” of what goods and services are eligible for salary packaging (from cars to computers to child care) is a daunting task making the range of services offered by McMillan an attractive proposition for rebatable employers.
Perhaps due to the complexity of the service or the fear of government meddling with FBT limits, McMillan remained the only ASX salary packaging stock for a decade. There are three newcomers to the field, and one – SmartGroup Corporation (SIQ) -- is up 410% since it debuted on 2 July 2014 with a first day closing price of $1.26. Here is a price chart comparing SIQ to MMS over two years.
Two more companies have entered the sector; one going public in March of 2014 and the other in April of 2015. The following table looks at the price performance of each of the four companies year over year and since their debut as well as some forward looking measures.
SG Fleet Group (SGF) describes itself as an outsourcing company whose primary business is fleet leasing. For employees of rebatable organizations the company offers novated vehicle leases, where the employee is responsible for the lease and the organization for the lease payments as part of the salary packaging plan. For all types of organizations the company offers an extensive array of services involved with fleet leasing, including acquisition and disposal, financing, maintenance plans, and insurance. SGF operates in Australia, New Zealand, and the United Kingdom.
In April SG Fleet was appointed to the New South Government Panel for offering novated leasing services to government employees. These panels include suppliers eligible to apply for business with the government. On 10 October the company was added to the panel for the Queensland government. According to the Full Year 2016 Annual Report, the company currently handles 95% of the NSW vehicle fleet. Financial results for the year were solid, with a 24% revenue rise and a 16% increase in profit. Subtracting the acquisition cost of privately held car buying and novated leasing company nic Pty Ltd and profit increased 26%. The company also acquired another privately held firm, Fleet Hire, in August and the two acquisitions along with the new contract with the NSW government bodes well for the company and its shareholders in FY 2017, with earnings per share expected to increase from the current $0.206 to $0.28 in FY 2017, a one year increase of 35.9%
Eclipx Group (ECX) is more diversified than its peers especially in the area of commercial financing. The company has multiple brands, includingFleetPlus (FP) handling salary packaging and novated leasing;FleetPartners handling business and personal leasing ranging from cars to commercial vehicles; FleetChoice which is similar to FleetPartners with extensive online tools for easier access; CarLoans.com which is an online consumer financing service; Right2Drive which is the company’s latest acquisition, offering 24/7 accident replacement vehicles, and Eclipx Commercial which is the financing operation for businesses looking to buy or lease vehicles and a variety of other commercial equipment.
Expectations for 2017 are high, with the Australian Financial Review reporting the company is in the hunt to acquire UDC Finance, a New Zealand based plant and equipment financing operation.
All of the stocks in the table pay fully franked dividends, with McMillan Shakespeare (MMS) sporting the highest yield, but the company has the weakest growth forecasts and the poorest year over year share price performance.
McMillan also offers a wide range of services to both consumers and corporations. Unlike its peers, the company does not use third party providers for its financing operation. McMillan has four brands -- Maxxia,RemServ, Interleasing, and Holden Leasing -- and has seen both revenue and profit increase each year, growing revenues from to $302 million in FY 2014 to $405 in FY 2015 with profit increasing from $55 million to $82.5 million.
McMillan does offer more outsourcing services than its peers, from the financing to fleet management for owned vehicles to expanded insurance offerings including homeowners.
McMillan’s Full Year Results for 2016 were solid with 29% increase in revenues, a 14% increase in earnings per share, and a 22% increase in profit, but the numbers fell short of market expectations and the stock price tanked. Here is the chart.
Included in the results announcement was the troubling prospect of McMillan’s largest client evaluating tender proposals from competitors. In addition, market sentiment may be moving to the newer players in the field, most notably SmartGroup.
SmartGroup Corporation Limited (SIQ) began operating in Australia as SmartSalary.com back in 1999, offering salary packaging services. Since then the company has acquired 12 related businesses with five of those acquisitions coming on board since the company went public in 2014.
SmartGroup offers similar services to its peers – salary packaging, vehicle leasing, fleet management, vehicle buying, -- but it is unique in one aspect and potentially disruptive in another. The company’s fleet management operation offers a cloud-based software program that can be further customised into a hybrid solution to better meet specific customer needs.
SmartGroup also offers workforce management solutions for staffing, workforce costing, planning and reporting. Currently the company is using its “world-class” proprietary software in Australian hospitals with a product called Health-e Workforce Solutions.
One of the company’s recent acquisitions, SmartEquity, offers share plan implementation and administration services with online communications and monitoring for both sponsoring employers and their employees. Workforce Management and Share Plan Administration are new additions to SmartGroup’s stable of offerings but investors should take note both are immune from regulatory changes to the FBT.
Government outsourcing is a key driver in the growth of salary packaged and novated and fleet leasing. SmartGroup’s software solutions could be tailored to take advantage of the continuing trend of government outsourcing in technology areas.
SmartGroup’s forward growth estimates are impressive and they are building on a solid foundation. SmartGroup had reportedly added 30,000 employees between 2012 and 2015 and increased revenues 50% from 2011 to 2015. In its first Full Year Financial report for 2015 the company posted a 51% increase in profit and a 25% rise in revenue. Half Year 2016 results coupled a 36% revenue increase with a 45% rise in profit.
In early July the company announced a key acquisition followed by another acquisition announced at the end of July along with a successful institutional placement to fund the acquisition. The stock price has been rising ever since. Here is the chart.
SmartGroup has won numerous service excellence rewards over the past five years and was named in the Business Review Weekly (BRW) Top 50 Most Innovative Companies in both 2013 and 2014. SmartGroup’s future potential could best be described by quoting its self-description from the company website:
SmartGroup is one of Australia's leading providers of employee benefits and workforce optimisation services
SGF Price at posting:
$4.48 Sentiment: Buy Disclosure: Held
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