McMillan Shakespeare Limited may be a bargain opportunity for investors

First-half 2014 profits were way down, but the business is intact.

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The half-year report of vehicle fleet leasing management company McMillan Shakespeare Limited (ASX: MMS) showed how it was materially affected by the proposed Fringe Benefit Tax changes put forward by the previous Federal government. The steep drop in net profit confirmed how severe the cut in business would have been had those legislative changes been made.

Between 2007 and 2012, the corresponding half-year revenues have been rising at a compound annual growth rate of 38.4%, then suddenly with half-year results released this month it is only up about 1% to $162 million. On top of that, even though the revenue was just a smidgen higher, the rise in expenses relating to employees and their retention during the troubled time up to and past the Federal election brought the half-year net profit down by 35% to $19.2 million, compared to the previous corresponding period’s $29.7 million.

Looking to grow the business, its acquisition of vehicle fleet management CLM in the UK was completed in October, and it will be working with the joint venture that the company and another UK vehicle fleet leasing management company called Maxxia already has in place. The expansion into the UK is relatively recent, so that will be a positive in upcoming reporting seasons.

After the proposed legislation was scrapped, the company began to ramp up business to return to the level it was at before the shock announcement. This has been ongoing, but this half year could not avoid being affected by it.

The company’s share price has still not made its way back to the $18 range it was at in July last year before plummeting to $6.75. It has recovered back to the $11-$12 a share range now. Even though those FBT changes are dead and buried, investors are waiting for the previous earnings levels and growth rates to return.

Foolish takeaway

I have written this before, but the company still has all its structure intact and the business model or its industry conditions haven’t changed really. This may be an opportunity for investors to take a position in a good company that had a terrible year by no fault of its own.

If the original earning power is still there, then it is possibly selling at a discount. That is maybe when we can get great companies at good prices.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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