When the Labor government announced proposed changes to the treatment of fringe benefits tax on motor vehicles in 2013 the impact on McMillan Shakespeare Limited's (ASX: MMS) share price was immediate and severe. The share price more than halved in one day and even though the proposed legislation was eventually scrapped, investors would no longer view the company in the same way.
Two years on and the shares are still trading well below their previous highs. This is interesting as McMillan achieved record earnings in its first half FY15 result and paid out its biggest ever interim dividend at the same time. It is clear that investors remain weary about the potential threat to McMillan's earnings from future legislative changes.
The salary packaging and vehicle leasing sector has been an area of strong growth over the past five years. Even with the change in sentiment around the sector over the past two years, McMillan has still outperformed the broader market and looks like pretty good value at the moment.
At the current share price of $12.29, McMillan is trading around 14x FY15 earnings forecasts and offers investors a fully franked dividend yield of around 4.6%.
McMillan has an excellent track record of earnings growth and over the last 10 years has achieved earnings per share (EPS) and dividend compound annual growth rates of 19.8% and 29% respectively.
In February, McMillan announced a new earnings accretive acquisition that will provide significant growth opportunities in the second hand car market from FY16. It is also growing its presence in the UK car finance market and operations there will be profitable for the first time this year.
Although the outlook for McMillan remains positive, there is another salary packaging provider that looks even more attractive at the moment.
Smartgroup Corporation Ltd (ASX: SIQ) has only been listed for 12 months and although the share price has already increased by more than 50%, investors are still being offered a pretty attractive value proposition.
The shares are trading on a price to earnings ratio of around 12 and investors can expect to receive a fully franked dividend yield close to 6%.
Smartgroup has produced some pretty impressive results over the last few years and this has created a solid platform for future expansion. Revenues have increased by more than 50% since 2011 and the number of employees under Smartgroup's management has increased by around 30,000 since 2012.
Although Smartgroup controls about 25% of the salary packaging market compared to McMillan's 55% market share, investors should note some of the key features to Smartgroup's business that could make it a potentially great investment.
Smartgroup has been able to grow its market share with an industry leading tender win rate of 43%. It has also developed a loyal customer base and recently confirmed several large contract renewals. 75% of its top 20 customers have been customers for more than five years and this has been built through industry-leading customer service and innovation.
The company also operates a capital light and efficient business model that generates very high levels of cash flow. Fees are collected directly from employees' salaries so there is no delay in recognising revenues and this also minimises the risk of non-payment for services.
Smartgroup has confirmed it is on track to meet its first half FY15 earnings guidance that will see profits increase by 35% compared to the first half of FY14. On top of this, its salary packaging and leasing volumes are at record levels and the company is confident that this trend will continue.
Foolish takeaway
It is too early to tell if Smartgroup will be as successful as McMillan, but the future for both companies is looking pretty good.
Although there will always be the risk of possible legislative changes, I feel both companies provide an attractive risk-reward proposition for investors seeking growth and income.
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