McMillan Shakespeare’s FVE Reduced on Lower Earnings Guidance

We have cut no-moat McMillan Shakespeare’s fair value estimate, or FVE, by about 5% to AUD 13.50 per share from AUD 14.20 following management’s guidance to lower net profit after tax, or NPAT, than consensus estimates. Management forecasts fiscal 2019 underlying NPAT to range from AUD 87 million to AUD 89 million, below current broker consensus of AUD 92 million. We had expected the company to face difficult operating conditions in all three of its segments and previously forecast below consensus underlying NPAT. The update suggests operating conditions were tougher than we accounted for, prompting a reduction in our fiscal 2019 underlying NPAT forecast to AUD 87.1 million, from 90.6 million. The reduction is primarily because of lower-than-expected earnings from its core group remuneration services, or GRS, business. Management blames a challenging retail car market for lower volumes and revenue in its GRS business. The company also faces ongoing headwinds in its smaller Australian and United Kingdom asset management, or AM, and its retail financial services, or RFS, businesses. According to our FVE the company has a fiscal 2019 P/E of 12.9 times and fiscal 2020 P/E of 12.1 times and fully franked dividend yield of 5.4% in both years.