Headwinds Don’t Change McMillan Shakespeare’s Solid Outlook

This story features MCMILLAN SHAKESPEARE LIMITED. For more info SHARE ANALYSIS: MMS

 – Goldman Sachs has reviewed earnings outlook for McMillan Shakespeare
 – Expects solid earnings growth in coming years
 – Retains a Buy rating

By Chris Shaw

A market leading position in salary packaging services and a strong share of the fleet management and associated leasing market has enabled McMillan Shakespeare ((MMS)) to deliver solid earnings growth since 2005. The trend continued in FY12, with the company delivering earnings per share (EPS) growth of more than 20% for the year. 

Having reviewed the annual report for McMillan Shakespeare, Goldman Sachs takes the view profits from the re-sale of used vehicles, which contributed 12% of profit before tax in FY12, may fall a little in FY13. This is due to a lower number of vehicles coming off lease and an expected decline in used car prices.

A significant downturn in car prices would force McMillan Shakespeare to review values for its existing fleet, with Goldman Sachs suggesting a 5% reduction would generate a $12 million pre-tax writedown. This would equate to 13% of profit before tax.

Goldman Sachs expects any decline in car prices is likely to be in the order of 2-4%, with the resulting earnings impact to be more than offset by growth in the fleet and Remuneration Services division. As a result, while earnings composition may be a little different in FY13, Goldman Sachs still expects net profit after tax for McMillan Shakespeare can grow by 15% in FY13.

Solid earnings growth should continue in future years, as Goldman Sachs currently forecasts capitalised annual growth rates in earnings for FY12-FY15 of 11% in EPS terms. EPS forecasts for Goldman Sachs stand at 81.8c for FY13 and 91.6c for FY14, which compare to consensus estimates according to the FNArena database of $82.4c and 92.1c respectively.

There is some potential downside risk to earnings from job cuts announced in the Queensland State Budget, as Goldman Sachs notes jobs will be cut in Queensland Health where McMillan Shakespeare is the sole provider. The Queensland Government is McMillan Shakespeare's largest client in the Remuneration Services division.

Any impact from these job cuts is unlikely to be significant, as Goldman Sachs estimates the net profit impact is likely to be around 2% on an annualised basis. Forecasts have been adjusted accordingly. There is a minor positive impact on price target stemming from higher market multiples, Goldman Sachs lifting its target 2% to $13.63. 

This compares to a consensus price target according to the FNArena database of $13.73, with targets ranging from BA Merrill Lynch at $13.50 to Citi at $14.14. Relative to the current share price, the consensus target in the database implies share price upside of around 10%.

Goldman Sachs sees enough valuation upside to retain a Buy rating on McMillan Shakespeare, which matches the Buy ratings from the three brokers in the FNArena database to cover the company. Dividends are also solid and add to the attraction of the stock, forecasts for Goldman Sachs implying a fully franked yield of 4.1% for FY13 and 4.6% for FY14. 

Over the past year the stock has traded in a range of $7.96 to $12.62. 

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