McMillan Shakespeare (ASX: MMS) recently reported net profit after tax of $54.3m for its 2012 financial year, making this another year of continued profitable growth. Over the last seven years, this company has achieved a 40% compound annual growth rate in profit – not something many others can claim.
It continues to reward shareholders handsomely, paying out 61% of profit with a final dividend of $0.25 bringing the total for the year to $0.47, a 24% increase on the previous year.
The company's success is largely thanks to Australia's income tax laws which allow some employees to have expenses paid for out of pre-tax earnings through an arrangement known as "salary packaging".
If an employer pays for something directly for an employee, it must pay Fringe Benefits Tax (FBT) on those payments, but there are some special FBT rules for organisations such as hospitals and charities. Depending on the exact type of organisation, these special rules mean that employees can currently get up to $16,050 paid towards their mortgage, for a credit card bill, for rent, school fees and even for overseas travel, all completely tax free! The FBT rules for state and federal governments and for private organisations are not as generous but still offer some advantages, particularly when it comes to leasing cars.
All of these FBT rules bring with them administrative complexities, which is where McMillan Shakespeare have found a business niche in advising and managing salary packaging arrangements for employers.
Because car leases feature heavily in many of these arrangements, the company has diversified slightly providing finance and ancillary services associated with motor vehicles. The vehicle finance arm of the business makes sense as a related activity and assists with marketing the much more profitable advice and administration services. However, it has much lower margins, requires debt to finance and exposes the company somewhat to the vagaries of the second-hand vehicle market.
In many ways, this is a unique business, at least as far as listed companies are concerned. Perhaps the closest comparisons might be with an accounting group such as the WHK Group (ASX: WHG) or perhaps litigation funder IMF (ASX: IMF) or law firm Slater & Gordon (ASX: SGH).
Foolish takeaway
The high return on equity and continued long term profitable growth have been reflected in the run up in the share price over the last few years. If management continues to achieve its goals shareholders should continue to reap the rewards, but the P/E at over 16 indicates that some of this growth is already factored in to the share price.
The obvious major downside risk is the company's complete dependence on quirks in the tax laws. If these were to be abolished, or even drastically simplified, the picture would look very different. But hands up those that believe any Australian government is going to make that happen in the foreseeable future!
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Motley Fool contributor Tony Reardon owns shares in IMF. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
