McMillan Shakespeare (ASX: MMS) outperformed the broader industry today with its release of FY19 results. The company achieved moderate revenue growth of 0.8% against an 8% decline in new car sales, highlighting their ability to grow market share against a challenging industry backdrop. This put pressure on the share price of SG Fleet (ASX: SGF) today, which is seen by many as the company most likely to pay for McMillan’s market share gains as their main listed competitor.
McMillan Shakespeare (ASX: MMS) office space (Credit: McMillan Shakespeare)
The firm is Australia’s provider of salary packaging and novated leasing services. This is attractive to employees, who can gain tax advantages from novated leasing, due to its treatment as a benefit allowing employees to put it through their pre-tax income. While leasing a car is more expensive than buying one over the long term, leasing is sometimes cheaper after taking account of the associated tax advantages. The business also operates in the UK and New Zealand, presenting attractive growth opportunities which can help the company expand from it’s existing base of market domination in Australia. Their UK operations were started through an acquisition, which McMillan has successfully managed since then.
One key reason why the share price has rallied is the announcement of an $80m share buyback. While many investors were expecting results from MMS to be much worse and the company provide its ability to grow against challenging market conditions, the underlying fundamentals don’t fully explain the share price gain. An off-market share buyback substantially increases the demand for shares, helping drive the price up over time. Realising this, traders are moving into the stock today in the hope of making a profit as management drives the price up through the buyback. Nevertheless, with MMS trading at 20 times earnings, the company will need to eventually support the multiple with better results in a good market, or else investors may start to question the multiple.
This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
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