McMillan Shakespeare Limited (ASX: MMS) is a leading Australian provider of salary packaging and motor vehicle leasing services. The company was hit hard in July 2013 when the then Labor government announced the proposed removal of fringe benefits tax (FBT) concessions in relation to motor vehicles and consequently the company's share price halved overnight.
However, the election of the Coalition Government in September saw this FBT policy reversed and consequently the company's revenue from its novated lease division has returned to historical levels. The company also reported a strong start to FY14 and has stated that the second half of FY14 should see a continuing improvement in the group's key business of remuneration services.
Is McMillan Shakespeare a buy at the current price of $9.26? Prior to the announcement of the proposed changes to the FBT regime, the company's shares were trading at $18, therefore the company's value today is half what it was in July last year.
The company reported half-year net profit of $19.3 million, down 35% on the previous period. The significant reduction in earnings was predicted following the proposed changes to the FBT regime. The announcement materially impacted orders for novated leased vehicles in Australia which is one of the company's key earning divisions.
At the current share price of $9.26, the company is trading at a significant discount to my estimated fair value and the intrinsic value calculated by many analysts. The reason for this is the risk that a future government will change the FBT regime and tax concessions relating to car fringe benefits. The current government have stated that they will not remove the concession.
McMillan Shakespeare has performed strongly since listing on the ASX in 2004, achieving a 17% compound growth rate in earnings. The company is the largest salary packaging company in Australia and has some key long-term corporate relationships. Barring further government change, the company should continue to see strong revenue growth.
Foolish takeaway
A future change to the FBT regime would have a materially negative impact to the McMillan Shakespeare business. However, the current share price provides for significant upside as earnings should resume their upward progression and the share price subsequently follow. Further, the company pays a good dividend yield of 4%.
