McMillan Shakespeare Limited (ASX: MMS) has experienced a turbulent 12 months following the impact of the previous federal government's proposed announcement to remove the concessional tax treatment in relation to Fringe Benefits Tax (FBT) on motor vehicles. As a consequence the company has seen its share price fall from over $15 to a low of $6.70 over the past 12 months, with the share price currently sitting at $9.10. However, the current government did not proceed with the proposed changes to the FBT laws and the 2014 federal budget resulted in no proposed changes to the FBT legislation that would impact McMillan's salary packaging or novated leasing businesses. Therefore, are the shares cheap?
Despite first-half FY14 profits down by 35% as a result of the former government's announcement, McMillan has stated that following the reversal of the proposed changes, it has experienced "business-as-usual" and is experiencing strong growth in its key novated leasing and salary packaging business, with salary packaging orders increasing by 15% over the last three months.
Analysts at Morningstar have forecast that FY15 will be a very strong year for the company, with earnings to increase by 35%. With McMillan shares currently trading on just 13 times FY13 earnings and providing a strong dividend yield of 4.5%, the current share price looks cheap!
McMillan has an impressive financial history, managing to increase net profit at a compound rate of 17% over the past eight years. The share price has also increased at an impressive rate of 35% annually since 2004. McMillan has a potentially lucrative opportunity to grow its business in the UK as well. The company sees the UK as a growth opportunity that requires little initial capital investment.
The risk that the current or future government will change the tax legislation has left investors with serious concerns as to the long-term viability of the McMillan Shakespeare business model because the majority of the company's earnings are derived from concessions from the FBT legislation. However, recent government commentary indicates that there will be no material changes to the FBT treatment of motor vehicles. For investors willing to take on a bit of extra risk, McMillan looks like great value at the current price.
