McMillan Shakespeare's Fair Value Estimate Unchanged Following UFS Acquisition

McMillan Shakespeare's acquisition of United Financial Services, or UFS, for AUD 42 million is small relative to its AUD 1.1 billion market capitalisation. The transaction will add about AUD 41 million in revenue from fiscal 2016, or a 10% increase on our current forecast. However, earnings before interest and tax, or EBIT, will only increase by about AUD 5 million, or 3%, reflecting UFS's EBITDA margin of 13%, well below McMillan's 50% margins. The transaction is too small to impact our fair value estimate which we maintain at AUD 13 per share. The shares remain fairly valued and we maintain our high fair value uncertainty rating, reflecting legislative risk associated with the salary packaging business. McMillan continues to lack an economic moat, despite returns on invested capital exceeding the weighted-average cost of capital, as legislative risk means the sustainability of investment returns remains uncertain.