Last week, Mcmillan Shakespeare Limited (ASX: MMS) made two important announcements in one ASX release. This is one stock I have been personally watching and waiting for news to come out about how it was recovering from a very undeserved share price fall in July 2013.
Now, I think it is time to call the stock a screaming buy. Here's why.
– Financing company acquisition
The number one salary packaging and vehicle leasing company announced it is acquiring Presidian, a leading independent provider of finance, warranty and insurance for the used vehicle market. This company dovetails well with Mcmillan Shakespeare's own business, expanding the services it can offer to its present customers to cover almost all aspects of owning or leasing a car.
In financial year 2014, Presidian generated $64.8 million in normalised revenues and $12.2 million in earnings before interest, tax, depreciation and amortisation (EBITDA). The transaction should be complete by the end of February and looks to be a great business combination.
— Early announcement of half year results
The second announcement was short, but it gave a peek into the earnings results due out later this month. Mcmillan Shakespeare expects a preliminary first half reported net profit after tax (NPAT) of $31.1 million. The company also explained that generally the first half profit result is usually about 46%-48% of the full year result. That means basically the market may look forward to a reported NPAT of around $64 million – $67 million by the end of June this year.
That's significant because the company will have returned to profit levels it achieved in 2013 before Labor's proposed change to fringe benefit tax calculations sent the stock spiralling down in July 2013. Those changes would have adversely affected the company's business, yet the legislation was never even voted upon. Since then, the stock has traded sideways.
— Now, Mcmillan Shakespeare's time may have come. Once back to previous business levels, the stock may be able to resume its climb upward. Company net profit margins were usually over 15% and return on equity was over 30% before, so it is strong business that generates good earnings. On top of that there is the extra revenue and earnings of Presidian in the future as well.
That's why I think it is a strong buy now, while the share price is relatively low, before the market finally realises how good this company can be.
