Vehicle leasing company SG Fleet Group Ltd (ASX: SGF) reported net profit after tax (NPAT) for the year to 30 June 2015 of $40.5 million, up 3.3% on prospectus forecasts. The company listed in March 2014 and so last year's statutory result only covers three months of trading and is therefore not comparable. However, revenue was up by 9.5% to $171.4 million and NPAT was up 14.4% on 2014 pro forma results.
Profits were affected in 2014 by proposals to remove fringe benefits tax concessions for vehicles by the previous Labor government before the 2013 federal election. Demand for SG Fleet's salary sacrificing services depends on these benefits. However, even when adjusting for this impact, profit before tax improved by 9.1% on last year.
Regulatory risk still hangs over SG Fleet but it is important to realise that just 26% of the company's fleet relates to salary packaging. The remaining 74% relates to the provision of leasing services to corporate and government customers.
One strength of the company is that it uses third parties to finance leases instead of taking on the risk itself. This means that the business is capital light and is able to generate high returns on equity. Return on equity was 29.1% in 2015.
Operating cash flows were $61.5 million, much higher than NPAT partly thanks to a rise in deferred income. A deferred income liability is recognised when a customer pays for services in advance. Advanced payment is an attractive quality for a growing business like SG Fleet as it leads to cash flows rising ahead of profits.
SG Fleet has two liability accounts on its balance sheet that indicate there is an element of estimation in its reported profit. Without going into details, the residual risk provision and vehicle maintenance funds are used to cover expected future obligations. As these obligations are somewhat uncertain, there could be surprises for investors further down the track.
If the liabilities exceed what is held in these accounts when they come to be paid out, reported profits have been exaggerated and if they are less, profits have been understated. Mistakes are inevitable when forecasting and either of these outcomes does not suggest any wrongdoing by management.
The most important thing about SG Fleet's balance sheet is that it includes lots of cash, $45.3 million after deducting debt. The company is therefore well placed to settle any future liabilities, continue paying dividends and invest in future growth. Total dividends were 10.8 cents in 2015 which equates to a dividend yield of 4% at current prices.
Foolish takeaway
SG Fleet is customer focused and uses technology to improve its offering. The average length of its relationship with its top 20 customers is more than 11 years and currently it wins more than 25% of tenders. The business is not weighed down by high capital requirements and has decent operating leverage, fleet per employee has risen from 196 to 213 since 2013.
For corporations and governments it makes sense to outsource fleet management since it involves lots of administrative work. Outsourcing to a specialist like SG Fleet often reduces costs as SG Fleet has better purchasing power and can provide the service more efficiently, leaving the organisation to focus on its core business.
Trading at an enterprise value to NPAT ratio of just over 15x, SG Fleet does not look expensive.
