This is the first of two articles about ASX-listed salary packaging and vehicle fleet management companies McMillan Shakespeare Limited (ASX: MMS), Smartgroup Corporation Ltd (ASX: SIQ) and SG Fleet Group Ltd (ASX: SGF).
Introduction
Salary packaging involves helping employees save money by taking advantage of fringe benefit tax exemptions such as novated leases for cars where partial payments can be made from pre-tax earnings. Vehicle fleet management involves managing the insurance, maintenance, replacement and financing of vehicles belonging to an organisation.
The Australian salary packaging industry was briefly under threat in 2013 when Kevin Rudd said he wanted to reduce fringe benefits tax deductions for vehicles should he win the federal election. This caused the share price of McMillan to crash by more than 50% and although Labor ultimately lost the election, regulatory risk remains.
Apart from that the sector has been rewarding for investors. The share price of McMillan is up 316.5% over the last 10 years with dividends over the period contributing a further 97.7% return. Smartgroup and SG Fleet were both only listed in 2014, but their share prices are up 221.7% and 44.3% respectively in the past year.
Who does what?
Smartgroup is almost purely focused on salary packaging with only a small proportion of the business dedicated to fleet management and other services. As well as providing outsourcing solutions, the company also sells a number of software products which enable employers to manage salary packaging and vehicle fleets in house.
In contrast, SG Fleet's business mainly consists of providing fleet management services and is therefore perhaps less susceptible to regulatory change. SG Fleet only offers novated leases, unlike Smartgroup which provides a full range of salary packaging services.
McMillan perhaps offers the broadest range of services of all three. It provides a full suite of salary packaging solutions, finance and fleet management services for organisations and consumer vehicle lending and insurance products. Whereas Smartgroup and SG Fleet use third parties for financing, McMillan funds vehicle leases directly, although it is moving away from this model.
Acquisitions
Smartgroup has made no fewer than five acquisitions since listing in July 2014. The majority of these are businesses operating in the company's core salary packaging division, but two of them signal moves into new channels.
In October 2015, Smartgroup bought 50% of Health-e Workforce Solutions Pty Ltd (HWS) for $6 million which provides software that helps healthcare providers optimise their workforce. HWS extends Smartgroup's software offering and should benefit from Smartgroup's large customer base in the health sector.
Another interesting deal was the acquisition of selected assets of Trinity Management Group (TMG) for an initial $1.7 million. TMG manages tailored equity plans on behalf of corporations and once again Smartgroup is hoping to leverage its existing customer base to grow the business.
Perhaps the most significant transaction that Smartgroup has entered into is the purchase of salary packaging business Selectus Pty Ltd announced earlier this week. The maximum consideration for the deal is $169 million which implies a 2017 earnings before interest, tax, depreciation and amortisation (EBITDA) multiple of 6.5 including $6 million of expected synergies.
