Why the Smartgroup share price is tumbling 12% today

A longstanding top 20 client contract is up in smoke…

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Key points

  • The Smartgroup share price is trading 12% lower to $6.45 per share 
  • Investors are selling off the company after it lost its contract with the Department of Education and Training Victoria
  • The loss is expected to reduce revenue by 5% in the next calendar year

The Smartgroup Corporation Ltd (ASX: SIQ) share price is steamrolling its way downwards on Thursday.

An update from the employee management services company regarding one of its long-term clients has dealt a blow to shareholder sentiment today.

At the time of writing, the Smartgroup share price is 12% lower at $6.45. For comparison, the S&P/ASX All Ordinaries Index (ASX: XAO) — of which Smartgroup is a constituent — is up 0.62%.

It’s a no from this client

After a challenging month for the Smartgroup share price, the situation has now worsened after the company’s latest announcement.

According to the release, the Department of Education and Training Victoria (DET Victoria) will not be renewing its contract with Smartgroup following a competitive tender process. Notably, DET Victoria has been a top 20 client in the past — making the loss that much more painful for the company and its shareholders.

In addition, the final contract transition data and terms are yet to be determined. However, what we do know is that Smartgroup does not expect the event to incur any material damage to revenue in CY 2022. Although, the following calendar year is expected to see a 5% reduction in revenue as a result.

Commenting on the contract loss, Smartgroup CEO Tim Looi said:

We are of course disappointed that Smartgroup was not selected to continue our relationship with DET Victoria, however, we have many strong long-term relationships with our diversified client base and continue to focus on customer experience as a key driver of those relationships.

It appears the market is focusing on whether there could be more contracts falling through. Such a concerning possibility is likely weighing on the Smartgroup share price today. Looi highlighted that there is still one renewal remaining this year, stating:

In 2021, we renewed or extended all top 20 contracts that fell due and we have now renewed or extended the majority of the top 20 contracts that fall due in 2022, with only one still remaining for renewal later in 2022.

Smartgroup share price snapshot

In the past 12 months, the Smartgroup share price has fallen by around 12%. During this time, shares in the company have been as high as $9.99 after it received a takeover bid from US-based TPG Global. However, that bid fell through after the investment firm conducted its due diligence.

Since then, Smartgroup has struggled to reclaim its former glory. In fact, the company is now trading at a 52-week low on the back of today’s news.

Based on the current Smartgroup share price, the company trades on a price-to-earnings (P/E) ratio of 14.5.

Motley Fool contributor Mitchell Lawler has positions in SMARTGROUP DEF SET. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended SMARTGROUP DEF SET. 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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