All Hail As McMillan Shakespeare Delivers

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

-Brokers raise earnings estimates
-New JV in the UK
-Solid leasing outlook
-More organic growth to come

By Eva Brocklehurst

McMillan Shakespeare ((MMS)), which provides workplace benefits administration services, has pleased brokers with its strong first half. In conjunction with the results, the company announced plans to enter the UK market in a joint venture with Visper, a UK-based asset finance company. Visper has had dealings with GMAC, the former owner of MMS' Interleasing business.

MMS has committed 1.5m pounds over five years to the JV, called Maxxia UK, and will appoint the managing director of the business. Citi is a bit surprised at this decision given there is organic growth opportunities domestically and it will take 2-3 years to scale up this business. What gives the broker comfort is that it requires little capital outlay and labour commitment. Credit Suisse thinks the JV is low risk and offers upside. Goldman Sachs suspects it may be a beachhead to further acquisitions in the UK. The JV will focus exclusively on distribution/brokerage of salary packaging and leasing products. BA-ML has put the news in the future drawer, noting it will be immaterial to earnings for some time.

On the FNArena database MMS draws two Buy ratings and one Hold. BA-ML and Citi have the Buy ratings and both have raised earnings forecasts for the company in the wake of the result. BA-ML said the result demanded an upgrade and has increased estimates by 5% for FY13 and 9% for FY14. Citi has increased earnings forecasts by 2% for FY14 and 4% for FY15. Goldman Sachs, while not a database constituent, has retained a Buy rating given the strong organic growth outlook.

The Hold rating comes from Credit Suisse, which has downgraded from a Buy on a valuation basis. The broker is attracted to the growth profile but finds the recent share price appreciation necessitates the move down. The database consensus target price of $15.85 suggests 10.4% upside to yesterday's closing share price. Indeed, Citi raised the price target to $16.56, despite solid returns over the last 12 months. This decision reflects a proven business track record and growth in the lease book, the broker maintains.

BA-ML believes the recent acquisition of fleet lessor, Interleasing, will allow the company to increase outsourced services to the private sector although the broker recognises competition is increasing. Credit Suisse has brushed this concern aside, noting operating drivers remain positive, especially in novated leasing, and these are supportive of further margin expansion. Citi concurs, noting the supportive industry structure and focused sales effort. The results were driven by strong operational performance from remuneration services and margin expansion occurred despite lower interest revenue. Then there's asset finance. Here the 27% growth in the lease book to $282m should underpin growth from that division in FY14 and beyond, according to Citi.

Goldman Sachs expects organic growth to come from further penetration of the South Australian Government employee base, now that MMS is the sole provider, and ramp-up of new corporate customers in asset management. The broker also finds further possible upside if any NSW health districts outsource salary packaging. MMS has flagged this as a significant possibility over the next 2-3 years. More potential is seen in the NSW government salary packaging contract which is up for tender. Goldman Sachs expects the incumbents, which includes MMS, will be retained.

Are there any negatives/risks? Well, the FBT salary packaging concessions are under review with a report due for the federal government in March. Goldman notes some risk for caps to be put on the value of venue hire and meal/entertainment but major changes are considered low probability. Although, if they do occur they will have a high impact. A significant fall in used car prices might affect leasing. Goldman notes profits from the resale of used vehicles were down compared with the prior corresponding half as the number of vehicles coming off lease fell. Finally, there's new ground being broken in the UK and that changes the company's risk profile, a bit.

See also, Headwinds Don't Change Macmillan Shakespeare's Solid Outlook on September 13 2012.

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