This is not investment advice. Do your research before taking a position in any of the securities mentioned in the post below.
A brief homage to TPG Global (US PE firm; not the internet mob)
Say what you will about PE, they certainly do know how to pick market cycles. We are in a buoyant time and as such, it is no surprise that TPG Global is doing an IPO at a >US$12bn valuation
However, I will save the TPG coverage for another day, I wanted to talk about one of the businesses which this PE giant turned down... SmartGroup ($SIQ)
Run me through Smartgroup ($SIQ)
$SIQ provides salary packing, vehicle leasing and fleet management services as well as a suite of smaller services. I will get to it later down... but their model is quite highly leveraged on the current Fringe Benefits Tax rulings
The most comparable Australian company to $SIQ is Macmillian Shakespeare ($MMS) who has been in this space for a long time (and were once the market leader) but has lagged $SIQ; partially due to:
$MMS making an ordinary acquisition in Eclipx and losing incumbent QLD contracts
$SIQ doggedly pursuing $MMS' vehicle leasing/novation business
Beyond $MMS, there are other possible competitors such as pure-play fleet businesses (e.g. $SGF) and there are HR platforms such as (HiTech/TrueBlue) which also operate in this space
What is Salary Packaging really...
Salary packaging is where you restructure your taxable income and take advantage of Fringe Benefits Tax (FBT) concessions. An obvious one is where you have a novated lease (typically for a car) between a financier, an employer and an employee.
Novated leasing allows employees to pay for a car with income on a pre-tax basis, thereby making the employee better off and the employer can attract workers from this service
$SIQ/$MMS usually make their money on two fronts
Clients pay for salary packaging services upfront to arrange the lease
Stream of commissions from the financier, the car dealer, the insurance provider and even post-sale services (e.g. mechanics)
$SIQ earn roughly $3k-$4k in fees for each lease it provides through this arrangement. In addition - they may provide fleet and retail financial services (on commission) but that is a minor driver
Per below, the barrier to entry for salary packaging is like funds management... it seems easy enough to start one up but, the majority of flow goes to those with a strong track record
Why discuss $SIQ vs. the others?
In my opinion, $SIQ is more prudently managed than $MMS (e.g. has made less dilutive acquisitions and gained market share) and is more fairly valued than the pure-play fleet managers (e.g. $SGF)
Additionally, despite years of steady growth, the company has seen a fall-off in revenues of late, resulting in some fairly attractive valuation metrics; 6.8% dividend yield and c.18x NPAT
Nonetheless, it needs to be mentioned that the fall-out of TPG Global's bid, does suggest that even at this price point they could not make the deal work out (potentially for other reasons)
>6.5% dividend yield... is it a buy on that basis?
Regardless of whether TPG is right/wrong in rejecting $SIQ... it is important to appreciate that the revenue for this business has barely grown in the last 3-4 years because the fleet market is competitive
Plus, understandably TPG would have built in a "regulatory discount" for the risk that the FBT rules change after they bought it.
Also, $SIQ has missed growing other services because the HR Tech market (e.g. Employment Hero etc) has taken off. These companies arguably provide better tech for Payroll, Employee Share Schemes and Workplace management
So as you can see - $SIQ's growth has matured and whilst they are great at cost management and has low interest costs; it is expensive at 18x P/E
Beyond the low growth profile, there's also inherent risks in salary packaging
The common reasons why one may not like these businesses are:
Risk of tax legislation changes: Whilst I consider it highly unlikely that salary packaging will go away completely, there has been a number of legislative changes which impact the economics of $SIQ. Any material change would adversely impact the $SIQ model...
Scalability beyond Aus: Localised legislation limits the ability for this company to fully scale (e.g. aside from MMS moving to UK) none of $SIQ's deal flow is outside of Australia and whilst they will say there is a big addressable market for this I think it is ultimately capped
The temptation to buy-out competitors: Historically these businesses have had to make bolt-on acquisitions to grow (Eclipx bought out by MMS or Selectus acquisition by Smartgroup). Whilst I do NOT consider this a bad thing - the flatlining of this business means there is an inherent temptation to do M&A which sometimes costs the shareholder
Conclusion
$SIQ is run very efficiently as a business, however, the regulatory risks associated with salary packaging and lack of growth does not make it appealing even at a low multiple
Growth in HR tech is an avenue for these businesses to grow, however to date I have not seen them grow in this space where others have (e.g. Xero/Employment Hero)
Time will tell if TPG's choice to not proceed with the takeover was due to forecast growth or other random factors
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