Investor day was underwhelming: MMS presentation provided investors with a greater understanding of the group’s growth direction and the macro theme across each of the divisions. Despite this, the presentation did not contain specific financial targets.
Tailwinds from EV adoption: The recent regulatory changes surrounding EVs are a significant macro tailwind for the novated leasing channel. The novated business saw a rise in new EV orders to 16% through 3QFY23 (from <2% in FY22).
Another tailwind caused by the change in EV legislation is the potential market growth resulting from cost ownership benefits, where owning a $66k EV costs the same as owning a $40k ICE vehicle. By educating employees about this, MMS can increase lease penetration and benefit from the EV legislation.
AMS NZ expansion is unjustified: The Automotive Management Services (AMS) business, which provides fleet and asset management services to corporate and government clients in Australia and NZ has less than a 3% market share and is a small player within the fragmented market. The allocation of capital towards the expanding aggregation of AMS in NZ, lacks justification in our view, especially when MMS has not actively pursued non-organic growth within that area.
It is time to take the winnings: MMS share price has had a good run, outperforming the market by >30% over the past year and >10% over the past three months. It is currently trading on a PER of 13x which is greater than one standard deviation above the three-year PER average. At these levels and after its recent market outperformance, MMS’s risk-reward profile is not as attractive. We to downgrade to a Hold.
Investment View
Although MMS stands to benefit from both the vehicle supply recovery and the trend towards decarbonisation, particularly with its novated lease business, its present risk-reward profile is unappealing at the current price level. We rate MMS a Hold. The dividend remains appealing at 107cps, with an expected 3yr CAGR of 2.67%.
Risks to Investment View
There are several potential risks that could impact MMS, including lower-than-expected novated lease volumes, increased competition from another salary packaging, fleet management and novated lease providers, and less-than-anticipated growth in the Australian and UK Asset Management markets.
Recommendation
We have reduced our recommendation to Hold from Buy.
Figure 1: MMS PER is trading >1 std deviation above its 3yr average
Figure 2: MMS vs leasing comps
