Income Report / Income Report: SmartGroup (SIQ), trap or treasure? (SIQ, VVR)

By Market Matters 18 December 19

Income Report: SmartGroup (SIQ), trap or treasure? (SIQ, VVR)

Market Matters Income Report 18th December 2019

A choppy open to trade this morning with a number of influences playing out. NAB is holding their AGM which comes after ASIC announced a lawsuit in the high court over fees for no service. The announcement was made at 5.12pm last night ahead of the companies’ AGM today, timing for maximum pain it would seem.

QBE has also come out with a downgrade this morning reducing its 2019 guidance, although a number of weathers related one offs to blame which is fairly typical of the insurer. Our cynical analyst on the stock Brett Le Mesurier concluding… The company says not to worry because premium rates are increasing, and the weather will probably not be so poor next year. On this basis, they have provided more optimistic guidance for 2020. We can only imagine the disappointment and explanations to be shared with investors this time next year! He has a sell on the stock and has been wrong for a while. The flipside of the argument is the benefit of rising bond yields, but the insurer is also seeing decent premium increases across their book. The stock hit a $12.52 low today however bounced strongly back to $13.13 at time of writing, down just 1% on the session.  

Oz Minerals (OZL) which we hold in the Platinum Portfolio is trading down -4% as Goldman’s downgraded the stock to a sell. We remain bullish OZL despite the downgrade – the analyst has been bearish / wrong OZL for some time.

Overall, the ASX 200 is currently trading a few points higher at 6850

ASX 200 Chart

The Income Portfolio was higher during the week, adding +0.95% which was behind the ASX200 Accumulation index which traded up around 2% - understandable given the near 50/50 split between equities and income securities. There was plenty of holdings that performed well during the week with Perpetual (PPT) topping the list with a gain of +6.95%. BHP and Rio were also strong, each adding more than 4.5%. The more defensive stocks were the laggards, shown by the -3.24% fall from Stockland (SGP). No distributions were paid in the week. The portfolio continues to track above the benchmarks, currently up +3.83% financial year to date, versus its absolute return benchmark of +2.26%. Since inception the portfolio is up +21.29% vs the benchmark of +13.18%.

SmartGroup (SIQ) – trap or treasure?

Salary packaging business SmartGroup (SIQ) has declined from an October high of $12.65 to settle yesterday at ~$7, a painful ~44% decline thanks to a number of issues, however as we often say, the elastic band often stretches too far in both directions. Today, SIQ trades on a Est P/E for FY20 of 11.3x while it is expected to yield ~6.25% fully franked, Morgan’s the no 1rated analyst on the stock with an $8.57 price target.

There have been three key issues for SIQ in the last couple of months that need consideration:

  1. Their largest shareholder Smart Packages sold their entire stake (~32m shares) in October via a block trade with Macquarie at $11.30. The stock was trading at $12.10 at the time, so the trade was done at a 6.6% discount to market. It was a $366m line of shares which is big, Macquarie took ~26m shares as principle (underwritten deal) and then sold them on. Smart Packages had crept up the register over time to get to ~25%, they were long term shareholders and used the rationale that the sale was a selfless one, simply to improve the liquidity of the SIQ register – I’m not so sure!  Clients of Macquarie who took SIQ assuming $11.30 price tag are now ~40% underwater.
  2. About a month later, their long standing CEO Deven Billimoria announced his retirement to be succeeded by the long standing CFO, Tim Looi with SIQ now looking for a new CFO. That in itself if okay however Deven holds 3.3m shares / $23m and he’s now a natural seller of at least some of that by the look. The timing here is also questionable. Smart Packages supported SIQ from the early days before they listed, held through the initial ASX listing at $1.60 per share  and a month after they sell their stake, the long standing CEO resigns! Again, some scepticism here required
  3. And finally, their latest update related to their insurance coverage after their underwriter confirmed intentions to change their product terms, a move that will cost them $4m from their FY20 net profits. If that number is annualised that equates to a ~10% earnings downgrade based on the company’s guidance for full year earnings of $81m.  

Clearly, a poor run for SIQ as the above-mentioned flow of events becomes too much for some and the stock is dumped, however is it now worth a look?

The main driver for SIQ earnings is salary packages, they simplify the process and are good at it. They also do novated leasing and fleet management + associated vehicle buying etc. New car sales important and recently these have been weak however as rates remain low and house prices rise; confidence ultimately improves which is a key for new motor vehicle sales.

Technically, 2 aggressive days of selling has played out and the stock should find some support on day 3 which is today.

MM now has SIQ on our radar as an income stock to buy, looking for selling pressure to subside.

Smart Group (SIQ) Chart

Service stations deals- interesting yield investments

Some activity worth covering recently in the service station sector that I find interesting – no immediate outcome from  a portfolio perspective however looking at how / what deals are being done is relevant for all investors, be it in shares or property, everything is relative after all.

1.       7-Eleven: Recently sold 15 sites on 12-year lease back agreements with 3% fixed rental increases for a total of $78m. Individual sales, mum and dad style investors on a net yield of 5.34%, tightest at 3.8% and highest at 6.1% (regional NSW site)

2.       Caltex (CTX): Owns and operates 500 petrol stations with plans to sell a 49% in 250 sites through an IPO. If the IPO proceeds, it will be a good test for the market in terms of pricing risk in petrol sites. Caltex has offloaded a number of sites in recent years that have mostly gone to developers to repurpose the land (Woolies plan on turning some into supermarkets) – initially 25 sites were sold for a total of $136m with reasonable demand, and another 25 are touted for sale. Currently hard to look at CTX as an income play – earnings are too volatile with retail and refinery swings. The IPO will be looked at closely from an income perspective, although I imagine yield will be tight given the current demand.

3.       Viva Energy REIT (VVR): The owner of 464 petrol sites, 95% leased by Viva Energy Australia (VEA) with Coles Express the retail operator. Fixed annual rent increases of 3% on these sites, triple net leases (tenant pays taxes, insurance, maintenance of sites) and long WALE (~12 years) with little near term lease expiry. These guys listed in 2016 at $2b to strong retail demand. Since IPO, VVR has acquired $230m assets while its portfolio has grown $92m through property revaluations – both set to continue. VVR currently yields 5.8% unfranked

4.       Charter Hall: They are in the process of buying a 49% stake in $1.7b worth of petrol stations leased to BP, 225 sites – split between head stock (20%), Long WALE REIT (CLW) (50%) and Retail REIT (CQR) (30%). WALE 20 years with first expiry in 18 years. Sites also triple net leases. These were purchased on a net yield of 5.5%.  

There has been growing concern around the sustainability of petrol station assets as the world moves over time to electric vehicles, however we’re seeing long term deals being done here which shows the high level of demand for long life stable assets. We’re also seeing service station assets being re-purposed into shopping / cafés, postal pickup locations etc.

MM is neutral the sector, although any aggressive selling will prick our attention i.e. VVR below $2.50

Viva Energy (VVR) Chart

Reducing Neuberger Berman (NBI) by 2.5% to make way for AMP Hybrid

This was a recent offer we covered in a note titled,  Why we’re adding the new AMP Hybrid to the Income Portfolio – click here.  The MM Income Portfolio is taking a 5% weighting in the issue. Given cash levels at 4.5% we are now reducing NBI by 2.5% from 7.5% to 5%. NBI plan to offer new units early in the new year at NTA backing, which is currently $2.05 and that would give us an opportunity to re-weight up depending on portfolio composition at the time.

MM is positive on the recent AMP Hybrid, adding it to the Income Portfolio with a 5% weighting

Conclusion

We are now considering SIQ as a yield investment
We are neutral service station assets for now although VVR looks interesting sub $2.50
We are reducing our NBI weighting by 2.5% around $2.07

Have a great day!

James & the Market Matters Team

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