Vehicle supply issues are distorting the picture for novated lease companies such as McMillan Shakespeare. This issue is expected to persist through CY22, but the associated earnings are simply being deferred.
MMS’ 1H22 net profit of $40 million was up 13% on last year (excluding JobKeeper benefits).
Disappointingly, EBITDA of $59.5 million was well below market expectations, but this is a two-edged sword. Much of the miss was due to the increase of carryover orders which has expended to $19 million or around 7x pre-COVID levels. The costs associated with that amount have already been incurred and so there will be an earnings windfall as this revenue flows through in CY23 and beyond.
Remarketing profits in the UK are currently 6x higher than pre-COVID levels and are likely to remain elevated as the Maxxia book runs off. Assuming the remarketing yields average 25% below current levels, MMS stands to repatriate more than A$30 million of capital, providing an additional boon for shareholders.
MMS has expanded its reporting by separating Plan and Support Services (PSS). The large growth in customer numbers (+69%) and support co-ordination hours (+19%) were factors behind the 19% increase in PSS revenue to $$19.5 million. There is still a lot of investment in people, technology and marketing plus some corporate costs to assimilate here, but the revenue side of the equation has some compelling data too. NDIS participants are expected to grow to 859k by June 2030 from 502k in December 2021. The number of plans eligible to be handled by Plan Managers will also increase as a percentage of total plans over time, currently at 53%. MMS’ Plan Partners business is the number two plan manager for the NDIS.
Investment view
The share price seems oblivious to the two significant catalysts waiting just around the corner in CY23. Trading at less than 12x PE ratio and a dividend yield over 5%, this is looking like a bargain. Near term earnings are constrained by COVID related supply issues and investment in the cost base.
Risks to investment view
Lower than expected novated lease volumes, increased competition in novated leases, salary packaging and fleet management would affect earnings.
Recommendation
We have retained our Buy recommendation.
