Why Smartgroup’s share price jumped 25% today

Credit: DalloPhoto Flickr

Smartgroup Corporation Ltd (ASX: SIQ) saw its share price jump 95 cents or 25% to $4.77, after the car leasing and salary packaging firm released a trading update today.

Here are the details for calendar year 2015 expectations…

  1. Revenues of $90 million (up 24% over the previous year)
  2. Earnings before interest, tax, depreciation and amortisation (EBITDA) up 46% to $36 million
  3. Net profit of $26 million (up 49% over the previous year)
  4. Earnings per share of 25 cents (up 46% on the previous year)

That excludes a one off after tax expense of $0.8 million. Those figures place Smartgroup on a P/E ratio of 19x, which appears reasonable if the company can continue generating earnings growth like it has this year.

Smartgroup also announced that it was acquiring Advantage Salary Packaging (ASP) for $60.8 million, with funding to come in the form of $10 milllion worth of new shares issued to ASP founder and joint-owner Anton Gaudry and the remainder in debt.

The company says the acquisition will result in pro forma earnings accretion of 18% for the 2015 calendar year. In simple terms, SmartGroup expects the acquisition to increase earnings per share by 18%.

Smartgroup’s peers include McMillan Shakespeare Limited (ASX: MMS), SG Fleet Group Ltd (ASX: SGF), although Smartgroup is roughly half their size in terms of market cap. Recent IPO Eclipx Group Ltd (ASX: ECX) also operates vehicle fleet leasing and associated financial services.

Here’s a quick comparison of the four companies and their most recent full year results…

Company share price ($) market cap ($m) Revenues ($m) Net profit ($m) margin price / earnings ratio
McMillan Shakespeare 12.98 1,073.5 389.6 67.5 17.3% 15.0
SG Fleet 3.78 941.7 171.4 40.5 23.6% 22.4
Smartgroup 4.77 494.6 83.1 13.2 15.9% 29.3
Eclipx 3.27 785.5 479.6 27.6 5.7% 21.3

Source: CapitalIQ

Foolish takeaway

If Smartgroup can continue to generate growth like it has in the past, then the current share price may be cheap. However, that is likely to become more difficult over time as the company runs into its larger competitors.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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