We bought salary packaging and novated leasing business Smart Group (SIQ) only a month ago, and straight off the bat, we’re down 10% – not a great outcome to date. We had been patient with this purchase, buying in post an ~18% pullback in the share price, but it has subsequently fallen more. This prompts the logical question: should we hold, fold, or even add? We have a 4% weighting so we do have room to increase the position size, but that’s not our preferred approach for now.
Weakness in share price has been a function of slower sales of Electric Vehicles (EV’s), with both listed car dealers recently downgrading earnings. SIQ & MMS had been enjoying strong growth in Novated Leases following the introduction of the EV tax exemption; however, this trend is now moderating. For context, SIQ’s Novated Lease Settlement growth was up +37% in the Dec-2023 half before moderating to +29% in 1Q24, i.e. growth in leases slowing in line with weakening demand for EVs. What, then, will turn the dial in the near term?
We think the next phase of growth in EV sales and, therefore, leasing volumes will be driven by a greater range of EVs being available at lower price points than current models. Lower values do have a negative impact on leased values; however, volumes are the key to this.
- A tough period for SIQ, now down ~30% from recent highs, and while we like the company in the medium term, we think the share price will remain muted until signs around volumes improve. On a PE of 14x, it’s now back to its ‘average’ PE, having been expensive while yielding over 6% fully franked.
MM remains cautiously bullish SIQ <$8.00
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