Smartgroup’s Share Price Correction Following 8% Fall

Smartgroup Corporation Ltd [ASX:SIQ] shares were the worst performing on the ASX yesterday, falling over 10% in less than two hours after the market’s opening. They closed at $7.42, down 67 cents from the previous day’s price.

On Tuesday, the employee management service company, who delivers salary packaging and fleet management, announced a change of director’s interest.

With their year-to-date return down 31.74%, it’s understandable that investors reacted negatively to the news. But should they have?

Today, Smartgroup share price have managed to regain some lost ground, currently sitting at $7.68, up 3.5% from yesterday’s hefty drop.

CEO remains committed to Smartgroup

The Change of Director’s Interest notice stated that Smartgroup Managing Director and CEO Devendra Billimoria has sold 1.1 million shares through an off-market trade.

With each share valued at $7.60, Billimoria made $8.36 million on the sale. The director’s holding is now down 27% from the 4.05 million shares they held prior to the sale.

But what is likely of greatest concern to current shareholders is the fact that this sale now put Billimoria out of the running for the upcoming fully franked special dividend of 10 cents per share, that will be paid out on 6 May.

Such a situation has caused investors to believe there is little future potential in the stock.

But Billimoria insisted this was not the case:

I have elected to sell down a minority portion of my shareholding for personal reasons. I remain a long-term shareholder and as ever am excited about, and fully committed to, Smartgroup.

This dividend is funded by existing cash reserves. Our debt level remains conservative and continues to provide us with the financial flexibility to fund growth options.’

Should investors have been concerned?

It is worth noting that Billimoria still holds a significant stake in the company, with over 2.9 million shares remaining.

Smartgroup’s FY18 results revealed a decent increase in revenue of 18%, and a similar EBITDA (earnings before interest, tax, depreciation and amortisation) increase of 19%.

Also, analysts have calculated a potential forecast operating cashflow expansion of 72%, which could lead to a promising 30% return on equity over the next couple of years.

And today’s price increase seems to coincide with the company announcing the date of their Annual General Meeting (AGM), which can suggest there are still some investors excited about the future potential of Smartgroup.

But it is sensible to keep in mind the current negative one-year return. Perhaps investors should keep this company on the watchlist until 9 May, the day of the AGM, to see how the stock is travelling then.

Regards,

Ryan Clarkson-Ledward,
For Money Morning

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Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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