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McMillan Shakespeare warns of profit hit, flags up to $100 million buyback

McMillan Shakepeare Ltd (ASX: MMS) shares could be volatile this morning after management told investors full year profit was likely to land up to $5 million below analysts’ forecasts at $87 million, before adjusting for a $3.7 million profit hit it will take for its UK business. 

The vehicle leasing business blamed the downturn on three primary factors; the UK asset management and broking businesses being impacted by increased competition and soft conditions, the Australian asset management business experiencing delays in end of contract income, and its GRS division facing “challenging conditions in the retail car market, with lower than expected volume and revenue growth”.

The $3.7 million UK write down is due to the bankruptcy of a client that is now effectively no longer providing it business on a series of short term vehicle leasing contracts it had agreed with McMillan Shakespeare.

Generally the automobile leasing, financing and trading sector in Australia has come under a lot of pressure over the past 12 months due to falling house prices, soft wages growth, and other indicators of receding economic strength affecting consumer activity. 

For example last week Carsales.com Ltd (ASX: CAR) warned its market-leading vehicle financing business Stratton Finance continues to perform below expectations, while Australia’s two largest second-hand car dealers in AP Eagers Ltd (ASX: APE) and Automotive Holdings Group Ltd (ASX: AHG) have both issued profit warnings in the last 12 months. 

For McMillan Shakespeare investors there is some good news though as the company also flagged today that due to its surplus capital, franking credit balance, balance sheet strength “and strong operating cash flow” it intends to undertake a share buyback over the second half of calendar year 2019 worth up to $100 million. 

However, this is unlikely to be enough to stop investors heading for the exits this morning. 

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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