Smartgroup Outperforms Despite Industry Headwinds
Salary packaging and administration services company, Smartgroup has been faced with a series of challenges in the past year. As a result of the disappointment, several brokers have proceeded to downgrade the stock. For starters, the firm’s longest-serving CEO Deven Billimoria who has been with the company since it was first established, has left his role in February 2020. Mr Billimoria is currently succeeded by Chief Financial Officer, Tim Looi.
Additionally, the firm’s major shareholder, Malaysia’s Smart Packages has announced that it will be selling its 32 million shares, or 25 per cent ownership in the company via Macquarie. The broker was asking for bids at $11.30 a share, whose aggregate amount will come to $370 million. Prior to this, Smart Packages was Smartgroup’s most substantial shareholder. Additionally, the company is also an indirect subsidiary of Usaha Tega, a private investment company headquartered in Malaysia. Moving forward, its next biggest shareholder is Challenger Limited, which reported a 5 per cent stake in the company.
Presently, the company’s insurance underwriter has made changes to the product terms and conditions. These changes will be implemented as part of the renewal of Smartgroup’s agreement with its underwriter in May 2020. As a result, its share price plummeted 16 per cent shortly after the announcement as Smartgroup foresees the changes to hit profits adversely. Specifically, net profit will likely see a $4 million decline in 2020, a 10 per cent downgrade according to 2019 earnings.
Consequently, the lower insurance product pricing will, in turn, translate to lower commissions for the firm and less revenue Smartgroup obtains from providing services to its underwriter. From a broader point of view, brokers view the regulatory scrutiny on add-on insurers as a permanent reduction in earnings. More notably, Morgan Stanley identifies the modest loss ratio on several of its insurance products that are sold as part of the lease offerings which drew the attention of regulators.
The underwriter’s response was to widen the scope of what is claimable all while reducing premiums. This caught the attention of Ord Minnett, who did not see how the company could mitigate the impact as a result. Amid all the negativity, Smartgroup produced decent results in its full-year results for 2019. As opposed to expectations, Smartgroup finished the year with a 4 per cent increase in profits. Specifically, it attributes its success on its ongoing strategy of increased automation and service expansion through acquisition and partnerships.
The company now owns 49 robots functioning within the operations and customer service sectors, equivalent to that of 55 digital FTEs. As the regulatory review surrounding add-on insurances persists, Smartgroup performed well despite facing industry headwinds. Specifically, total novated leasing volumes spiked close to 5 per cent even as sales within Australia’s private new vehicle plummeted 8 per cent in 2019.
By Caroline Wong
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