SHARES in MMS have been smashed in the last few days by the Rudd government's surprise crackdown on the FBT treatment of leases on cars used predominantly for private use.
Analysts believe that they've seen the worst of the carnage, but obviously, the exact damage will remain unknown until after the election. It will be valid to consider, however, that the current event may have exposed the company’s business model inherent risks from which it is unlikely to ever fully recover regardless who is going to win the election.
I am asking myself, is it worth to risk it and buy?
Now, I consider myself a chicken when it comes to risks, and while every investment have it’s own risk, there is a significant level of risk in buying MMS. If the government win the next election and the changes in the regulation are implemented, the effect for MMS might be quite devastated. It is possible to imagine 30 or 40% lost of investment in a short space of time (August-September).
On the other hand, what if the opposition win the election? Opposition Leader Tony Abbott has said that he does not support a change to the FBT car rules. If the changes were not implemented, McMillan Shakespeare would be left intact and growing. The price before the plunge was $18.
Other consideration:
As I mentioned earlier, regardless the election outcome, there will be a scar in MMS business model due to this recent scare. The market might reassess the value of MMS, so it probably will not shoot back up to their previous price in the short run.
I am not good at estimating stocks’ future price, especially with this sort of uncertainty towards it. Let’s see what the analysts and experts said:
- Tim Boreham - Criterion: Criterion believes that even if the amendments survive the election, this morning's share reaction has been overdone because the affected leasing arrangements are only part of McMillan's business. We'll back the bookies with a speculative buy call.
- James Lennon, of Ord Minnett, estimated shares would steady between $8 and $9. He said this was based on half the company's novated leases being for private use, which would equate to a 30 to 40 per cent hit to earnings. "There has always been this risk with this stock," he said, adding he expected revenues to recover, but not the share price.
- Claude Walker - Motley Fool ; Even if the changes to salary packaging do not go through, the risk that the rules will change will not go away. That’s because under the current system people are (in effect) allowed to claim tax deductions for cars that are used mostly for personal tasks. If you forecast earnings to be 90 cents per share this year and were happy to pay a P/E of 14, then you would still only pay $12.60 for each share in this company. Personally, I wouldn’t even buy at that price.
- Bank of America Merrill Lynch is urging investors sell the stock with a price target of $6 a share.
- Citi set a target price of $12.60 on the shares earlier before the halt lifted, with a 'sell' recommendation.
- Goldman Sachs has put a 12-month price target of $9.45 on the shares, with a 'neutral' recommendation to clients, on the view that uncertainty will overhang the sector for up to four months before the proposed changes are abandoned.