The salary packaging and novated leasing company has been on our Hitlist for nearly a year, and yet we’ve not pressed the buy button. We have owned the stock in the past and we know the company well, however, our lack of action in recent times has clearly been a mistake with the stock nearly doubling over the past 12 months, and is now trading ~28% above our previous exit level ($6.60). The rally has been driven by the market’s attention on the growth stemming from Electric Vehicle (EV) sales. Increased sales of higher-priced vehicles, which is the case with EVs, should in theory help SIQ earnings, and this is clearly a trend we’re seeing from consumers, underpinned by tax incentives.
Like any new trend, however, the market does move ahead of time which has led to a big re-rate higher in the PE multiple the market is prepared to pay for SIQ. Over the past 5-years, SIQ’s average multiple is 13.6x with the stock now on 17.08x, which shows that the rally in the shares has primarily been driven by this expansion over and above actual earnings growth.
This PE expansion is predicated on forecasts for higher margins in the year ahead versus what was achieved in the past, but we’re not yet seeing this. The broad assumption that higher-value EVs would help drive margins was downplayed in their recent half-yearly results, with SIQ saying that the yield on EV leasing is expected to be in line with its non-EV leases. While the values are higher which drives higher finance commissions, more competitive rates are needed which hurts the margin while there are fewer aftermarket add-ons put on these vehicles, which also bites.
The share price has been volatile since this update with the current price action looking like a recalibration of the market’s expectation around EV-driven margin growth. As SIQ stated in their results (1H), 30% of all new novated quotes are for EVs which clearly shows the direction the market is moving towards, and SIQ is well positioned to capture this trend, however, given the valuation uplift and more downbeat rhetoric around margins, we think SIQ will struggle to go on with it until they can show tangible benefits of this trend.
- While we think SIQ is a good business, we think ~$7.50 is the level to buy it.
MM is neutral SIQ ~$8.50 but would get interested ~$7.50
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