Criterion: Electric cars drive novated leasing take-up

Despite the discontinuance of the FBT exemption on petrol-electric vehicles, EVs will remain a popular choice for novated leases.

When it comes to novated leases, EVs have been something to sing about. Pic via Getty

• Spurred by their FBT-free status, EVs account for a disproportionate share of novated leasing relative to their slow overall adoption

• The FBT exemption for plug-in hybrids expired on April 1, but providers expect ongoing solid demand for battery-only EVs

• The overall salary packaging and fleet management sector is proving its defensive chops in a torrid market.

Listed salary and car packaging providers have emerged as ‘defensive’ stocks during an election campaign in which there’s no whiff of fringe benefits tax (FBT) reform.

Beyond the Coalition’s promise to bring back the 1980s-style long lunch, at least.

The radio silence on FBT is understandable, given the strife then PM Kevin Rudd encountered when he attempted to curtail the concessional car FBT rules in 2013.

Availing of the car FBT concession, the vehicle novated leasing industry is at the epicentre of the salary packaging industry.

Often maligned, electrical vehicles (EVs) are now a key element in the sector’s fortunes.

This is courtesy of the government’s July 2022 measure, exempting non-luxury battery electric vehicles (BEVs) and plug-in hybrid electric vehicles (PHEVs) from FBT altogether.

The PHEV benefit expired on April 1 – the start of the FBT year – but the BEV concession lives on.

EVs drive novated leasing popularity

A novated lease means an employee leases a car of choice, with the employer remitting lease payments out of the worker’s pre-tax salary.

Smartgroup Corporation (ASX:SIQ) says EVs accounted for 44% of its novated leases in calendar 2024, while rival FleetPartners Group (ASX:FPR) puts the tally at 53%.

Smartgroup says PHEVs accounted for about one-third of the EV leases, but CFO Jason King is confident that PHEV clients will drift either to the BEVs or petrol vehicles when their leases expire.

Some will continue to lease PHEVs with the standard FBT car concession.

“We are starting to focus on converting those customers irrespective of the type of vehicle,” King says.

“We focus on getting right car to the right customer, so even with the changes we will continue to take that approach.”

BEV stays, pity about PHEV

King says the sector is confident the BEV benefit will remain, citing “good bipartisan support”. An amendment would require legislative change.

He says abolishing the PHEV benefit was disappointing  in a public policy sense, because it discriminates against rural dwellers who don’t want to rely on a battery alone.

Currently, EV’s comprise only about 2-3% of the nation’s car fleet, but they account for around 10% of new car sales.

King contends the measure has helped boost EV awareness, which had flagged because of unjustified range anxiety and concerns about lithium batteries exploding.

Elon Musk’s cost-cutting antics and generally intemperate utterances also aren’t doing any favours to the Tesla brand.

More broadly, the salary sacrifice/novated leasing sector has benefited from robust post-pandemic demand – especially in the public sector.

Ostensibly, the Coalition’s pledge to trim the bureaucracy sound alarm bells for Smartgroup, which claims a 50% share of public sector novated leases.

As the pushback to Musk’s US jobs purge shows, not all ‘public servants’ are pen pushers.

“It’s actually a defensive sector,” says King, noting the client base is dominated by doctors, nurses, teachers and other essential workers.

Motoring along nicely

Whatever the case, investors have spoken with Smartgroup, Fleet Partners and McMillan Shakespeare Group (ASX:MMS) shares notching gains over the last month despite the broader market tariff-vails.

Smartgroup reported a $73.5 million net profit for calendar 2024, up 17%, on the back of a 20% surge in novated leasing settlement volumes.

McMillan Shakespeare’s December half profit edged up 3% to $45.2 million, with flat volumes. Given the company lost a major contract to the SA Government in June 2023, management’s claiming that one as a win.

With a September balance date, Fleet Partners reported a 4% net profit decline to $78 million, but novated leasing volumes surged 35% to $331 million.

In late March Fleet Partners reported “good earnings momentum”, so we’ll await the company’s May 12 interim numbers for more colour on EV sales.

Will diversification stave off the acquirors?

While Smartgroup largely is a salary packaging pure play, McMillan Shakespeare has expanded into other sectors including warranties and NDIS plans.

As it names implies Fleet Partners has a sizeable fleet leasing business.

The biggest novated leasing provider, SG Fleet (ASX:SGF) is subject to a $1.4 billion takeover offer from Pacific Equity Partners.

Formerly known as Eclipx, SG Fleet acquired Leaseplan’s local business in 2021, for $270 million.

We subscribe to the ‘London bus’ theory with acquisitions, so don’t be surprised if other parties are running the ruler over the ‘surviving’ ASX players.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision

Originally published as Criterion: Electric cars drive novated leasing take-up