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McMillan Shakespeare shares punished

McMillan Shakespeare (ASX: MMS), one of the ASX’s market darlings and Australia’s largest salary packaging company, has lost $550 million of its $1.14 billion in market capitalisation in today’s first few hours of trading.

After a week in a trading halt, the company lifted the pause and has almost halved as a result of the huge changes to the fringe benefit tax (FBT) on vehicle leases. Despite a FY13 profit 15% greater than that of its FY12 year and a high chance of a coalition victory at the next election, the company and investors are sceptical of changes to restore the company’s share price.

MMS has dampened even traders’ spirits when chief financial officer Mark Blackburn said “the company is not currently in a position to provide any further guidance on any final dividend payment for the year ended June 30.”

It released a statement today stating, “MMS, it’s employees, its shareholders and its customer base of not for profit institutions, charities and public and private sectors find themselves in an uncertain business, investment and service environment which MMS considers is not likely to be resolved with sufficient certainty or clarity until after the outcome of the Federal election”.

Although the company can’t be sure about what will happen at the next election, it now bears the scars of its political risk, which will be a concern even if we witness a change of government.

According to MMS, the damage stemming from the changes to the FBT will create an “unknown and unquantifiable decrease in demand for novated leases and an adverse impact to the business overall”. However the damage to its Group Remuneration Services (GRS) business, which provides salary packaging, can be roughly estimated to be $81 million of FY13 preliminary results. But it could run deeper for the company, which currently pulls 45.7% of revenue from the division.

Foolish takeaway

MMS and shareholders were blindsided by the changes to the FBT and the government could have pulled the funds for their carbon price from anywhere. However it is a stark reminder of investors’ needs to analyse all types of risks associated with a company — whether they be cyclical, business, political or any type of specific risks. It’s too early to tell whether or not the company represents value but there is always the possibility the market has overdone it. However it would be a risky short-term trade that isn’t necessary, particularly when there are so many other great stocks on offer.

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Motley Fool contributor Owen Raszkiewicz does not own shares in the companies mentioned.

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