FY22 Result: MMS reported an FY22 EBITDA that was in line with market expectations and an NPATA that was ~4% ahead of consensus. MMS robust cash generation and strong cash balance have allowed them to declare a final dividend of 74cps, bringing the full-year dividend to 108cps, a payout ratio of 100% (FY21 66%).
Business simplification & Capital Management to the fore: MMS positively surprised the market by announcing a commitment to a more robust capital management program. MMS outlined that it intends to prioritise surplus cash flow by investing in sustainable growth, M&A, dividends, and share buy-backs.
Its most recent capital management initiative is the amendment of its dividend policy to a payout ratio of 70-100% of NPATA. Additionally, it declared an off-market buy-back of up to 10% of the group’s ordinary shares. This buy-back will deliver ~A$95m of capital back to shareholders.
The newly appointed CEO, Rob De Luca has been focused on streamlining operations and improving shareholder returns. The continued run-off of the UK Maxxia book, saw the divestment of the CLM fleet management business (May 22). Additionally, with management stating their intention to consider exit options for the UK, demonstrates how MMS are taking positive steps towards simplifying its business model and realising the inherent value of the stock.
Warehouse to be an A$11m NPATA headwind in FY23: A slight negative to the FY22 result was the financial impact of the warehouse being marginally higher than initial expectations.
Throughout FY22, MMS’s warehouse was used to fund a small volume of novated leases. Initially, the annualised impact was implied at A$8-10m, however now it is marginally higher at A$11m.
Core GRS divisions outperforming: MMS’ core Group Remuneration Services (GRS) division delivered a better-than-expected FY22 result. More importantly, the momentum in the division was in significant contrast to that of its largest peer (SIQ).
Despite supply constraints, rising interest rates, and deteriorating consumer confidence, MMS was able to deliver a strong sequential improvement in its divisional profitability. Its order volumes have sustained low single-digit growth and demand is showing no signs of softening.
FY23 outlook: The better-than-expected FY22 result coupled with reasonably upbeat near-term trading commentary suggests that the GRS business is well placed to deliver growth in normalised earnings through FY23.
The current vehicle supply dynamic is expected to continue through FY23, with novated yields to remain high and novated orders to remain at an elevated trend that was seen in FY22 (~+3%).
Investment view
The simplification and capital management initiatives announced to date are positive initial steps in realising the inherent value within MMS.
Despite the strong rally in the stock from the June lows, MMS is still only trading on <12x PER FY23E. This in conjunction with an attractive dividend yield (7%) and expected ongoing restructuring affirms our view that MMS is a buy.
Risks To Investment View
Risks to our investment thesis on MMS include Lower than expected novated lease volumes through the forecast period, increased competition from other novated lease, salary packaging and fleet management providers, weaker than expected growth in the UK and Australian Asset Management markets, an unexpected change in fringe benefits tax regulations, a slower lower than expected ramp up in the Plan Partners business and additional regulatory impacts on the RFS business.
Recommendation
We have retained our Buy recommendation.
FIGURE 1: EBITDA FY23E FALLS DUE TO THE SELLING OF ITS CLM DIVISON AND THE CONTINUED RUN-OFF OF ITS UK MAXXIA BOOK. EBITDA GROWTH EXPECTED FROM FY23 ONWARDS
