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Margins Colour McMillan Shakespeare’s Outlook

Australia | Aug 23 2019


Brokers say McMillan Shakespeare could outperform as car leasing and salary packaging businesses continue to grow.

-Investment in Beyond 2020 program to help expand margins
-Increased automation will add to margin expansion
-Novated leasing volumes have proven to be very resilient in the face of falling new vehicle sales.
-NDIS administration unit Plan Partners posts first profit, with momentum going into FY20

By Nicki Bourlioufas

Shares in car leasing and salary packaging company McMillan Shakespeare ((MMS)) jumped after the company announced an $80m share buyback and rise in net profit after tax (NPAT).

Analysts are upbeat on the company's earnings outlook, expecting margin expansion driven by the company’s Beyond 2020 program Plan Partners expansion into the disability sector.

Net profit jumped 26.6% to $63.7m for the year to June 30, while underlying net profit, which strips out one-off items, fell -5.1% to $88.7m. While that was down, it was at the higher end of management's guidance. Group revenue rose 0.8% to $549.7m on the previous period.

The result was underpinned by strong performance in the group’s core Group Remuneration Services (GRS) business, with a 2.5% increase in salary packages and 7.4% increase in novated leasing units despite weak new car sales.

McMillan Shakespeare said it would return around $80m to shareholders through an off-market ordinary share buyback, to be funded from cash reserves. The buyback is expected to boost earnings per share (EPS), as the number of shares on issue will be reduced.

Investment in the group’s Beyond 2020 comprised $3.1m in operating expenses and $6.0m in capital expenditure for FY19, assisting to drive improved productivity and novated lease conversion rates during the year, with the full program impact to be realised in future years. The National Disability Insurance Scheme (NDIS) administration business Plan Partners recorded its first profit of $580,000, with $400,000 being the company's share.

Margin expansion expected

One of the most upbeat brokers is Citi, which says the NDIS business Plan Partners is gaining momentum will help McMillan Shakespeare achieve sustained growth in FY20 and beyond. In addition, the company's robotics and automation program will improve efficiency and margins.

Already, McMillan Shakespeare's accelerated spend as part of the Beyond 2020 program has started to deliver improved productivity and better conversion rates in novated leasing. Citi has increased its target price by 7% to $17.15 and says the resilience shown in the core novated leasing and salary packaging division “is a real reminder of the ‘acyclical’ appeal of the offering.”

Citi also notes that McMillan Shakespeare has just won a Victorian Health contract and retained six Tier 1 contracts for a minimum of three years, adding to the robustness of earnings.

Credit Suisse too is very optimistic about earnings growth and expects McMillan Shakespeare to Outperform. The broker expects the buyback to boost EPS by about 6% and has raised its target price to $16.55 from $14.00 due to higher GRS earnings.

The company has shown it can grow novated lease growth well ahead of the car market, comment the analysts. When a cyclical recovery in new car sales occurs, “MMS should be well geared to upside.”  The Beyond 2020 investment too will drive future margin expansion.

Morgan Stanley also expects McMillan Shakespeare to outperform, noting the Beyond 2020 program and Plan Partners' strategy bring further upside growth potential. “Based on our normalised FY20 EPS estimate, we derive a P/E-based valuation of $15.80.

UK Exit Would Be Welcomed

Morgan Stanley notes that if the economic environment becomes more negative, this would lead to steeper decline in new vehicle sales. Uncertainty regarding the UK's exit from the European Union could also weigh on earnings.

The net amount of assets financed grew by 11.3% across the year to nearly $1.0bn in the UK, albeit price pressure continued to impact revenue growth. McMillan Shakespeare is currently undertaking a strategic review of the UK businesses.

Macquarie observed that underlying volume growth in GRS as well as improved consumer and economic conditions provides a solid foundation for improving for margin expansion combined with investment in the Beyond 2020 program. Macquarie maintains a Neutral call on the stock with a 12-month price target of $15.64.

Ord Minnett too is sticking to its Hold rating on the stock, though it has revised higher its target price to $15.10. The broker says the UK asset management business continues to struggle, and the outlook for the next six months remains "muted". The announcement the UK operations are under a ‘strategic review’ came as a welcome piece of news to the broker.

According to FNArena's database, the consensus target price is $16.21, suggesting +3.5% upside to the last share price. Targets range from $15.10 (Ord Minnett) to $17.15 (Citi).

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