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MMS - McMillan Shakespeare

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MMS is one of my long term holdings.

Its half yearly looks good to me. No market reaction – probably because a solid report was already priced in.

The key point to me from the results was
Extension of credit lines on better terms reinforces MMS business model’s “bankability”.
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The stock does have legislative risk – that aside it ticks most other boxes for me. The combination of the cash cow remuneration division coupled with the cash hungry asset leasing business makes a pretty formidable business. Heaps of cross sell opportunities and scale efficiencies still to come from this company over time.

The remuneration business is the jewel in the crown. Because of their scale and established systems they are far more efficient than any “in house” processing of the payroll implications arising from novated leasing. Switching cost means they don’t lose too many customers once they have them. Providing operational leases and lease funding gives them package deal and cross sell opportunities that competitors don’t have, plus something to do with all the free cash flow from remuneration services.

Historic share price appreciation since listing ~26%. current dividend yield around 6% grossed up.
 
craft said:
MMS is one of my long term holdings.

snip

Historic share price appreciation since listing ~26%. current dividend yield around 6% grossed up.
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MMS has increased its dividend every year whilst increasing its Book Value per share every year.

I've been looking for other companies that can achieve this, as a preliminary screen before studying further.

Do you think that this is a reasonable first screen?
 
craft said:
MMS pops into the ASX200 in the latest S&P rebalance.
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These seem to ahve fairly minimum impact these days. The big IB's have forecast a quarter ahead of new inclusions (and they are usually right). In fact, if I was S&P I will just let the IB's do the work on who should be included!
 
skc said:
These seem to ahve fairly minimum impact these days. The big IB's have forecast a quarter ahead of new inclusions (and they are usually right). In fact, if I was S&P I will just let the IB's do the work on who should be included!
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Not suggesting in MMS' case that this should cause a price reaction - just throwing a little light on a rarely discussed company that has grown into the ASX200.

It does seem the lumpiness around changes that used to exist is mainly sorted but I think inclusion in the indexes and hence in more peoples universe of selectable stocks has an effect on valuation multiples over time.
 

That's true. Inclusion in an index cant' hurt.

MMS is a very unique company and it's a great business if not for it's fat tail risk in regulation changes...kind of similar to CAB in my mind. One needs to be able to price the tail risk appropriately (rather than totally avoid it) to make these kind of plays work (or just lucky and ignorant).

I sold these back at ~$6 so I am not very good at pricing that risk (or the market is wrong)...
 


Risk is the possibility of different outcomes – the poorer business outcomes haven’t come to pass. Happy to take that whether it is luck, ignorance or reasoned probability.




skc said:
I sold these back at ~$6 so I am not very good at pricing that risk (or the market is wrong)...
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I’m not sure that actual outcome is really the best measure to judge a risk probability decision.




The Henry review and response of eliminating the stupid KM travelled difference but reconfirming novated leases de-risked these guys a lot in my view. Gov’t reducing FBT benefits for itself and tax exempt charities is low probability in my book because they would be creating themselves extra expense to offset the change.
 
The tail-risk that has plagued this stock for years looks like it is popping up again with Kevin Rudd's announcements this morning.

The company has also announced that this will have a material earnings impact. We will find out how much in due course.

Whilst the changes still pend an election result - is Abbott likely to look at the same areas to fill the gaps as well?

I agree with skc and haven't been able to buy into this as while the company has a great business model, there is the dark side of government intervention looming over it and the price hasn't compensated for it since I have found the company (I wasn't investing during the GFC or when it got slapped last time "FBT changes" were mentioned).

Certainly a long-term wealth winner if you get it at the right price, however.
 

Very true. Although MMS is a company built on the regulation in the first place - so regulation change was always in the shadow. While companies like CAB and Cash Converters are operating in sensitive areas where regulations enter their domain for better or worse.

Would be interesting to see what happens on open. It's a stock priced for growth and definitely has a market darling status. My guess is that it will fall a fair bit (say 20%+, but really depends on the updated guidance by management) on re-open but that may be close to the low of the day... a bit like BRG and ORL when they lost a large chunk of their revenue.
 
skc said:
VMy guess is that it will fall a fair bit (say 20%+, but really depends on the updated guidance by management) on re-open but that may be close to the low of the day... a bit like BRG and ORL when they lost a large chunk of their revenue.
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MMS could be an interesting speculative play if it does tank at the open. I suspect the government may give ground on this issue soon and MMS could rebound strongly as a result.
 
The potential for regulation change has always been there and was almost certain to occur sometime in my holding time frame. It has now come to pass. What has surprised me is how poorly it has been done. Rudd 2.0 – MRT all over again.

Arguably good policy in removing subsidy for personal use vehicles but implementation is a balls up. MMS is best positioned in an industry that will be devastated more by the implementation then the actually policy change.

MMS business is much more than just Novated Leases for personal only use. Balance sheet is in shape to take the hit – The non-diversified competition is toast as of yesterday because of how this has been handled. A lot of the jobs in the industry will be lost – probably even before the fate of the election outcome and whether these changes actually get implemented, is known.

Looking forward to some volatility. As I’ve seen so much misinformation and confusion over the last few days I’m not sure if the price will dictate I’m buying or selling. The company guidance before trading may result in a more informed market in which case I might just be doing what I do best – Nothing.

The growth premium and market darling status should arguably have more impact on the price then the revenue stream hit. The business is mainly labour – once the uncertainty is clarified the business can resize(code for sack people – the real losers of the schizophrenic tax policy approach).


Paul King, managing director of Selectus, says he will be forced to lay off 100 staff on Friday and predicts there will be 2000 redundancies across the salary packaging sector by the end of July
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http://www.brw.com.au/p/business/mid-market/cause_salary_looking_packaging_redundancies_kYWCEYRtMCUHlijM3RLWuK
 
MMS has been granted a trading suspension until 25/7 so MMS shareholders will be holding their breath for another week. The language of the release seems ominous in that they are indicating an inability to originate novated leases.
 
FxTrader said:
MMS has been granted a trading suspension until 25/7 so MMS shareholders will be holding their breath for another week. The language of the release seems ominous in that they are indicating an inability to originate novated leases.
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Management are spoil sports.

Was looking forward to playing in an uninformed market.

- - - Updated - - -

Ves said:
http://www.fnarena.com/index2.cfm?type=dsp_newsitem&n=279CBEF9-AA85-EF4C-70CF0164A1A31186
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The linked fnarena article is incorrect on the Novated Lease facts – seem to be making the same mistake that the pollies have also been sprouting in the media – I guess this is what happens when people don’t understand and don’t consult.

And thus receive an assumed deduction of 80%
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Firstly FBT is payable when a car is provided for personal use – there was no rorting by pretending business use when none existed the very reason FBT was levied is because the usage was private.

FBT liability is calculated at 20% multiplied by the car value. So if a 35K car is leased and provided as part of the salary package to an employee for personal use then the FBT liability is 35Kx20% = $7000.
The potential tax saving is the difference between actual cost – say 10K to run the car and the $7K calculated under the statutory method. FBT though is levied at the top marginal rate of 46.5%.

The majority who take novated leases are actually on the 34% marginal tax rate so the PAYE saving is 10K x 34% = $3400. The FBT liability is 7K * 46.5% = $3255. Total tax saving in this example $145.

A lot of novated leases actually had to include employee contributions from after tax earnings to neutralise the fact that FBT liability would be greater than PAYE tax savings if all costs were paid pre tax.

What Novated leases did do was give people access to their employers GST status and get them access to fleet pricing and in many cases provided the financing that they would not otherwise necessarily get.

There will be ripples for the car manufacturing industry. Not to mention a tightening of the low km used car market. And probably even safety and environmental impacts from older cheaper cars on the road. None of the ripples considered and the 1.8bn savings are questionable at best. – Possibly result in a cost to the economy. But who cares when making policy on the run – probably surprised them that what they thought was a funding arrangement for an election promise resulted in an immediate impact. It is this uncertainty that is the biggest killer – do you start to re-organise the business today or do you wait?

Muppets.
 
There's a good novated lease calculator on Remserv's website that explains the benefits and how it all work.

https://www.remserv.com.au/salary-packaging/novated-leasing-calculator

It doesn't seem to mention FBT payable and it didn't ask whether the car is for private or business use.

I am guessing there's a disclaimer somewhere that says FBT depends on nature of the car use...

And I think that's the problem with MMS's novated lease business. Many people are using novated lease and claiming business use (and hence little FBT) when they are indeed just private use. The inclusion of FBT will make these deals much less attractive.

MMS still has a large part of the business in salary packaging in general. I have a friend working in a NSW public hospital and the sort of things they can package is pretty wide ranging. While some will call that perks, the reality is that doctors are paid less in the public hospital system compared to them going private practice. So you'd have to pay them one way or another.
 
Isn't the fall in the SP, the talk about jobs lost, new car industry devastated etc a little premature?

The proposed FBT legislation is a corollary of the promise to move to an ETS a year earlier.

The government will not be recalling parliament before the election, therefore there's no chance of the legislation even being put up.

The Greens and the Coalition have both clearly asserted they will not support it, so it won't get through the Senate.

Labor have to win the election yet. Then there would have to be a change in the make up of the Senate in July for there to be any chance of it getting through.

This ETS promise is a clever bit of politics by Rudd. It blunts Mr Abbott's attack on a key policy area, and sounds good to voters who naively believe everything promised will come to pass.
For companies to be shedding jobs on the basis of a bit of campaigning by Mr Rudd, however, is imo quite unjustified.
 


SKC your understanding on novated leases seems to share the general population confusion.

The statutory formula has inbuilt assumptions. The outcome of which varies depending on value of vehicle, tax scale etc.

At the moment for the majority FBT liability roughly equals or is massaged via employee contributions to equal PAYE savings.

Under the new rules FBT liability for anybody on less then 180K is going to be way bigger than PAYE savings because FBT is levied at 46.5%. Executives with BMW’s will still be O.K because their marginal rate = FBT rate. But for anybody on less than the top Marginal rate it will be too punitive.

At the moment because of the uncertainty NO novated leases are being written. When the dust settles it will still probably be viable for 100% private usage Novated leases if you are on the top tax bracket if not employers will simply switch back to providing fully maintained company cars to their execs.

Mum and Dad on average wages are screwed unless the likes of MMS can come up with another mechanism that gives them access to fleet buying power, employer backed financing and GST savings (arguably the real gov’t subsidy)



The Rebatable FBT, 17K Exempt & 30K Exempt business (mainly gov’t and charities) are MMS real bread and butter and this change is not significant to that business though the legislative risk here remains and will be heightened in the mind of the market. However if the Gov’t changes legislation in this area it will be cutting off its own nose so arguably less likely to occur then the Novated lease changes.
 
Julia said:
Isn't the fall in the SP, the talk about jobs lost, new car industry devastated etc a little premature?
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No because the effective date was 16 July and the industry can't write new leases with the current uncertainty - This is the worst policy implementation I have ever seen (at least that which I understand in detail).

The damage is being done yet it might not even happen.
 

The key issue for MMS shareholders is what the Coalition will do with this FBT issue post-election should they have an outright majority (still likely in my view in spite of the Rudd factor.) So far they are not giving an indication whether or not they will roll back labor's changes.

The industry reaction was predicatable and almost certainly overestimates the real impacts. Even if the move to bring forward an ETS does not succeed I doubt the FBT changes being rolled back by either party given the worsening budget postion. This leaves MMS shareholders in the lurch and likely forced to realize a significant loss or hope for a policy change in the future.
 
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