1 Reason McMillan Shakespeare (MMS) Shares Are Falling

McMillan Shakespeare Limited (ASX: MMS) shares have fallen 5% this morning following a market update. Here’s what you need to know.

About McMillan

McMillan Shakespeare is Australia’s largest provider of salary packaging and novated leasing services as well as a provider of fleet and asset management and financing. From its beginning in 1988, McMillan Shakespeare now has over 1,200 staff and 21 subsidiaries that include Maxxia, RemServ and Holden Leasing.

Market Update

McMillan released a market update to the ASX this morning stating its 2019 financial year (FY19) underlying net profit after tax (UNPATA) is expected to be below broker consensus estimates.

Estimates for FY19 were $92 million, but McMillan has revealed the true figure will likely be between $87 million and $89 million.

Not included in that estimate is a provision of $3.7 million due to an unexpected number of vehicles being returned prematurely to the UK asset management business after the liquidation of a customer. Once this setback is considered, the true underlying NPAT figure will likely be around $85 million.

McMillan says the reason for the downgrade is that the GRS division has faced challenging conditions in the retail car market, leading to lower volume and revenue growth. The Australian asset management business also experienced an increase in contract extensions, delaying income.

The issue in the UK business is expected to be a one-off.

Dividends Look Safe

McMillan shares trade at a fully-franked dividend yield of 5.27%. McMillan stated that, despite the setbacks, strong operating cash flows and conservative gearing means that the company has surplus capital and excess franking credits, so dividends will likely be unaffected.

McMillan also stated they are considering further acquisitions after the failed merger with Eclipx Group Ltd (ASX: ECX) earlier this year. An off-market share buyback of up to $100 million is expected to occur in the second half of 2019.

Is McMillan a Buy?

McMillan’s growth potential seems low given current conditions, but if cash flow is as strong as the company claims, it could be a good option for dividend income since the yield is roughly in-line with some of the big banks, such as Commonwealth Bank of Australia (ASX: CBA).

For other dividend ideas, check out the companies mentioned in the free report below.

Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.

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