McMillan Shakespeare Under-Appreciated?

This story features MCMILLAN SHAKESPEARE LIMITED, and other companies. For more info SHARE ANALYSIS: MMS

McMillan Shakespeare’s latest earnings showed resilience, reaping benefits from investment in technology and services

-McMillan Shakespeare’s share price got battered in March
-Recent results brought some optimism back for analysts
-Investing for future growth considered a winning strategy

By Danielle Ecuyer

Still growing three decades on

As a leader in salary packaging and novated leasing, McMillan Shakespeare ((MMS)) was founded in 1988, initially concentrating on salary packaging services. The company listed on the ASX in 2004 and expanded into novated leasing and fleet management with salary packaging solutions for both private and public sector employees in 2007.

In the 2010s, management acquired several companies for diversification, including fleet management and asset finance. In 2015, through its Plan Management and Support Services division, the company expanded into disability plan management, aligning with the National Disability Insurance Scheme (NDIS).

Smartgroup Corp ((SIQ)) and McMillan are the largest market players in Australia’s salary packaging market and both competitors have a major business presence in the novated leasing market. 

In terms of the company’s salary packaging client base, government, healthcare, and not-for-profit industries represent around 97%, offering a more defensive tone to the customer base, with some holding more favourable fringe benefits tax exemptions, Morningstar observes.

McMillan’s revenue is split as follows: around 55% is generated from Group Remuneration Services (GRS), with Asset Management Services (AMS) representing around 37%, and Plan and Support Services (PSS) accounting for circa 7.5%.

Morningstar explains McMillan has a more capital-intensive business model than Smartgroup. The company uses a mixture of debt financing and free cash flow to acquire fleet vehicles, with a securitisation program to assist in funding the growth of its novated leasing business.

McMillan generates a mix of recurring fees, commissions, and rebate income. Strategically, it cross-sells its services, and with investment in technological innovation, the company achieves better staff productivity while lowering customer costs. Management has also focused on increasing dealer relationships to offer more vehicle choices to customers.

Better than feared earnings results

Delving into the company’s first-half results, analysts inferred a ‘sigh of relief’ about the earnings, given the challenging macro-economic conditions for new vehicle sales in Australia. Macquarie spoke loudest, saying McMillan achieved “a high-quality beat given investment in growth and one-off costs”.

Morgan Stanley, which has selected the stock as one of its six key small/mid-cap Conviction Buy ideas post-reporting season, points to robust underlying growth from the Group Remuneration Services business, with 1H25 “better than feared”.

While novated orders for the period fell around -2%, Ord Minnett points to a strong December 2024 increase of 18%, with momentum sustained into January, growing 21% year-on-year. Electric vehicles, including plug-in hybrid EVs, expanded to circa 46% of novated sales (plug-ins at 33%), while yields slipped by -1% against the previous half-year.

Novated Leasing and Market Performance

Results for novated leases came in at 76.6k units, a rise of 0.1%. However, backing out last year’s South Australian government contract, underlying growth stood at 7.8%, which pleased the Macquarie analyst. Ord Minnett views the launch of the small-to-medium-sized business-focused brand, Oly, as performing well, reaching 3% of all novated orders during the half.

McMillan achieved new car sales growth of 3% in the first half versus a year earlier, up 52% against 1H23. This compares to an overall market decline for new car sales of -3% over the half-year and growth of 15.1% versus 1H23. In other words, McMillan outperformed the market.

Expense Growth and EBITDA Impact

Ongoing growth in expenses for Group Remuneration Services resulted in earnings before interest, tax, depreciation, and amortisation (EBITDA) declining -13.8%, despite overall sales growth of 6.8%. Non-recurring costs of -$4.4m impacted the EBITDA margin, which fell -650bps to 38.5%. Excluding one-off costs, the decline stood at -340bps.

Looking to the second half of 2025, Bell Potter anticipates operating expenses to moderate, with management indicating business-as-usual expenses of -$3m for wage inflation and around -$2.5m for the delivery of Oly.

Asset Management and Plan Support Performance

Asset Management Services achieved revenue growth of 2.4% in the first half over the year, with customer fleet renewals assisted by written-down value up 8.8% and financed assets up 2.8%, Macquarie highlights. Bell Potter believes the division performed in line with expectations.

Plan and Support Services recognised revenue growth of 6% on last year, with earnings before interest, tax, depreciation and amortisation up 19.7%, and the margin reaching 29.2%, due to a 10.1% increase in customers and better operating leverage via platform automation on invoices. Bell Potter notes average revenue per user remained constant over the half.

Are investor concerns discounted in the share price?

Morningstar views McMillan’s ongoing investment in new systems and customer acquisition as “sensible” to remain competitive and avoid contract losses.

Looking ahead, yields on novated leases may come under pressure as vehicle prices fall due to excess supply and competition. The change in favourable government policies for increased EV affordability is highlighted by Morningstar as a potential risk to the company’s future novated lease volumes, due to the company’s high exposure to EVs. Morningstar views the growth potential for Plan and Support Services as underappreciated by the market.

Morgan Stanley takes a counter position on the outlook for novated leasing, with McMillan exiting the first half with 19% growth in orders, despite the higher comps from the previous year, including the SA government contract. This analyst believes there is greater durability in earnings momentum than is currently reflected in the share price. The stock is rated Buy-equivalent, with a target price of $20.

As stated earlier, McMillan Shakespeare is one of Morgan Stanley’s key post reporting season picks for small/mid-caps.

Bell Potter addresses the lack of quantitative guidance from management for 2H25, although net profit after tax is expected to be “incrementally better” than the first-half result. This analyst takes a “wait and see” approach on the stock, with the only Hold rating among daily monitored brokers, and an upgraded share price target of $16.30, up from $15.80.

Both Macquarie and Ord Minnett continue to ascribe Buy-equivalent ratings, with respective target prices of $18.74 and $19.00. Ord Minnett views the McMillan story through the lens of earnings “gaining momentum,” while Macquarie sees operational strength coming from retaining a simple business model.

Morningstar retains a fair value of $17 and views the share as “moderately undervalued.” Potential concerns around volume growth and declining yields are viewed as already discounted in the share price.

The consensus FNArena share price target from highlighted daily monitored brokers is $18.388. Following share price weakness in March, that target is now more than 38% above where the shares are trading at. Consensus dividend yield has risen to 9.5%.

Apart from Smartgroup, other ASX-listed companies that compete are Fleetpartners Group ((FPR)) and SG Fleet Group ((SGF)).

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