MMS – McMillan Shakespeare Limited

McMillan Shakespeare Limited (ASX:MMS) is a market leading provider of salary packaging and vehicle leasing administration.

Is this business easy to understand?
McMillan Shakespeare Limited’s business divisions provide salary packaging and vehicle leasing administration to major employers across Australia and New Zealand.  In 1988, the company was first to introduce salary packaging services in Australia.  It now enjoys long standing relationships with many prominent health, not-for-profit, government and private sector organisations.

In 2010, McMillan Shakespeare acquired Interleasing and Holden Leasing.  The purpose of this acquisition was to compliment its salary packaging division with expertise in operating leases and asset management services.

McMillan Shakespeare has five wholly owned divisions: Maxxia Pty Ltd, Remuneration Services (Qld) Pty Ltd, Maxxia Ltd (NZ), Interleasing Australia Ltd and TVPR Pty Ltd trading as Holden Leasing.

Does this business have a sustainable competitive advantage?

  • McMillan Shakespeare is a market leader in salary packaging. They have utilised this leadership advantage by building a strong, reliable business that deliver genuine savings to customers.
  • McMillan Shakespeare offers exceptional service which has lead to a growing customer base.
  • Collectively, McMillan Shakespeare business divisions can address employers’ complete workplace benefits needs.  It provides expertise in salary packaging, novated leasing, associated Fringe Benefits Tax administration, operating leases and asset management for ‘tool of trade’ vehicles.
  • The company’s tenure has led to mature systems and processes that ensure a competent, seamless experience for customers. Furthermore, its systems capability is complemented by personalised, responsive service and deep understanding of the customer experience.
  • McMillan Shakespeare has retained its industry leadership position for more than two decades now.

What are the risks facing this business?
The big risk to McMillan Shakespeare is the debt level they are carrying.  Their debt level hit its peak when they borrowed over $140 million in 2010 to acquire Interleasing and Holden Leasing.  At the time, this represented a debt level being 150% of the company’s total equity.

The McMillan Shakespeare half yearly report dated 21 February, 2012 shows a net debt level of 82%.  The debt level is still over $140 million, although their assets have grown which has reduced the overall debt level percentage.

Is it run by able and trustworthy management?
McMillan Shakespeare has been run very well for many years and still enjoys a high return on equity.  It generates reliable cash flow.  Prior to the ‘elephant’ sized acquisition of Interleasing and Holden Leasing, this was a successful business with all the right ingredients in place.  However, with the acquisition, the management changed one ingredient in the recipe which changed my outlook of the business from an investment point-of-view.

McMillan Shakespeare is now eating the elephant one bite at a time.  It will be interesting to see if they can keep eating and continue to reduce the portion of the elephant that they owe the bank.

Is it trading at a bargain price?
McMillan Shakespeare is a little expensive at the moment.

Company Code Rank 2010 Actual Valuation 2011 Actual Valuation Today’s Share Price Margin of Safety 2012 Forecast Valuation 2013 Forecast Valuation 2014 Forecast Valuation
McMillan Shakespeare Limited MMS Bronze 1 $7.00 $9.83 $11.02 -19.01% $9.26 $12.75 $13.03

*Please note that this estimate of intrinsic value is subject to change on a daily/weekly basis.

In summary, McMillan Shakespeare is a good business with high profitability, good cash flow, high debt and experienced management.  It is currently slightly expensive based on my fundamental metrics.  The business has all but one ingredient in place which means it is not an investment candidate for me for the time being.  I will watch McMillan Shakespeare’s progress with interest.

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This article is published by Dean Mico.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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