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Smartgroup share price on watch after profit warning

The Smartgroup Corporation Ltd (ASX: SIQ) share price will be on watch on Monday after the release of an update on its insurance business.

What did Smartgroup announce?

This morning Smartgroup advised that the earnings from its sales of insurance products are expected to be impacted in FY 2020.

According to the release, Smartgroup’s insurance underwriting partner has advised that it intends to make changes to the terms of the insurance products sold by its authorised representatives, including Smartgroup.

The company’s underwriting partner intends to implement these changes as part of the renewal of Smartgroup’s contract in May 2020, with an implementation date of July 1 2020.

Management warned that the unmitigated financial impact of these changes in 2020 will be a reduction in after tax profits of approximately $4 million.

How is Smartgroup performing in 2019?

The Smartgroup share price is trading roughly flat in 2019 after a mixed 12 months.

In the first half of FY 2019 it delivered revenue of $125.8 million and profit after tax of $40.5 million. This was up 3% and 5%, respectively, on the prior corresponding period.

And for the full year, NPATA is expected to come in at $81 million. This will be an increase of 3.8% on FY 2018’s $78 million.

Whilst this is reasonably positive, the reason for the underperformance of its shares has been the exit of its long-serving CEO.

Smartgroup’s shares have fallen heavily since Deven Billimoria announced his plan to retire from the role of managing director and chief executive officer in October. He will step down at the end of February 2020 after the release of its FY 2019 results.

Mr Billimoria has been with the organisation for more than 19 years, having joined in 2000 and being appointed CEO in 2002.

Although the company has revealed that its current chief financial officer, Tim Looi, will replace Mr Billimoria in the top job, that hasn’t stopped some investors from hitting the sell button. Shareholders will no doubt be hoping that today’s news doesn’t drag its shares into the red for the year.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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 Scott Phillips.

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