McMillan’s Disappointing Trading Update Drives a Modest Reduction In Our Fair Value Estimate

No-moat McMillan Shakespeare’s stronger-than-anticipated second-half performance in fiscal 2019 has stalled in first-half fiscal 2020. Management indicates the company is experiencing more challenging market conditions than expected in Australia, New Zealand and the United Kingdom. The company is continuing to grow its customer base in its core Group Remuneration Services, or GRS, business in both salary packaging and novated leases, but by a slower rate than expected. Continuing weak business and consumer confidence, and particularly weak new car sales are the primary reasons for the disappointing trading performance. The recent federal government tax cuts and RBA interest rate cuts have yet to stimulate demand and it appears the weak economic conditions are likely to persist over fiscal 2020. The trading update drives an approximate 6.5% reduction in our fiscal 2020 underlying net profit after tax, or NPAT, forecast to AUD 85 million, toward the midpoint of management’s earnings guidance of AUD 83 million to AUD 87 million. Our fair value estimate is reduced more modestly by about 5% to AUD 14.20 per share.