McMillan Shakespeare Limited (MMS)

HOLD

Earnings catchup

FY23 RESULTS ANALYSIS

24 Aug 2023

Sector: Industrials

Need To Know

Stronger than expected result, driven by its GRS and PSS divisions.
Divestment of its UK business for net proceeds of $20m was below expectations, but net positive for valuation multiple.
EV demand continues to grow with penetration of novated orders at 21% in June.

Results overview (vs consensus):

EBITDA A$142.4m, A$135.53m consensus

NPATA A$86.2m, A$79.6m consensus

DPS 124cps, 118cps consensus

MMS’s stronger than expected result was driven by its core Group Remuneration Services (GRS) and Plan and Support Services (PSS) divisions. GRS revenue was up 9%, +2% ahead of consensus, driven by a 13% rise in novated lease settlements and an expansion in the number of salary packages and novated leases under management.

The PSS division delivered +18% revenue growth, primarily fueled by a 23% growth in its customer base.

Exited from the UK. MMS has simplified its business portfolio with the sale of the RFS aggregation business in August 2023 and now the announced agreement to sell its UK business (sale expected to be completed by 1H24) for net proceeds of A$20m.

We believe the sale of these assets is a positive for MMS, as these non-core assets were a distraction and multiple dilutive. We do not expect to see any further changes to the portfolio over the near term.

EV volumes growing. The effect of the EV legislation is continuing to have a positive impact on the demand for novated leases. EV volumes continue to climb, reaching 21% of novated lease orders in the month of June.

Outlook. No quantitative guidance was provided. MMS’s outlook commentary was generally positive with the main highlights being that they see the FY23 auto supply dynamic and EV uptake to continue.

$23m in CAPEX will be put towards improving their customers’ digital experience for its Simply Stronger Program.

Investment View

While we maintain a positive outlook regarding the impact of the EV legislation on MMS novated lease volumes in the near term, the YTD rally in MMS share price (~50%) highlights to us that at its current price, further outperformance will be hard to achieve. Greater evidence needs to be observed by the market of increased novated lease volumes being translated into the group’s earnings before justifying any additional outperformance. Based on this, we rate MMS a Hold.

Risks to Investment View

Lower than expected novated lease volumes. Increased competition from other novated leases. Salary packaging and fleet management providers.

Recommendation

We have retained our Hold recommendation.

Figure 1: Increased novated lease volumes need to be translated in the company’s earnings profile to justify any further outperformance.

Figure 2: EV% of MMS novated lease orders

Stock Overview

Key Properties

Financial Forecasts

Share Price

Company Overview

MMS is an Australian finance company that offers salary packaging, leasing, asset management, and disability services. It has 3 business segments and serves the government, public and private sectors, and health organizations.

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