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Lease Peace


Lease Peace

Having purchased McMillan Shakespeare (ASX: MMS) shares at $7.25 after Kevin Rudd’s comments, we’ve written extensively about the investment case (see here, here and here). Since then, we have also written about our expectations that changes to novated leasing are unlikely to feature in the coming budget. The market doesn’t seem to share our view, with the share price of McMillan Shakespeare reflecting material risk to the downside.

We currently believe, however, that the market may not be fully appreciating material risk to the upside.

In 2013, McMillan Shakespeare entered the United Kingdom through a joint venture with Visper Asset Finance and also through the purchase of CLM Fleet Management. Like Australia, the car leasing market in the United Kingdom is relatively mature. But there are two structural changes that are expected to occur and which could provide material tailwinds for the company.

The first comes from the Basel III regulations, which will impose higher capital and liquidity charges on European banks. As a result of these changes, many investment banks are exiting the leasing space, yet still want to provide funding for independent leasing operators. This is great news for companies like McMillan Shakespeare, as the exit will present a sizeable gap in what is a relatively mature market, while the cost of borrowing in the UK is considerably lower than Australia.

The second tailwind are the potential changes to the novated leasing market. In the UK, novated leases are not portable between employers. This means that when an employee with a novated lease resigns, the employer will be responsible for the asset. In Australia, novated leases are portable when employees switch employers. Should the UK adopt the Australian model, MMS is well placed through experience to replicate its domestic success.

Management have indicated that they believe the United Kingdom business could be just as big as Australia’s. While this is a long-term goal, it would certainly help fill the void left by any adverse changes to the novated leasing scheme in Australia, if that were to transpire.

Ben joined Montgomery Investment Management in 2012. Prior to joining Montgomery Ben was an Analyst at the Reserve Bank of Australia. Ben is a CFA® charterholder.


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This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564) and may contain general financial advice that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking advice from a financial advisor if necessary.


  1. Hi Roger,
    I am a fan of MMS and a shareholder, but I am feeling the pain at the moment. There is a lot of contradictory stuff out there on the extent to which the Remserv affair will affect future revenues. Like Jiantan, I am very interested in your thoughts. Also do you have an idea when the UK operations will start to make a real difference to the earnings?

  2. Hi Roger / Ben,

    Do you have any thoughts on the latest news of Remserv being temporarily banned from giving quotes for novated car leases to Queensland government employees?

  3. The market once valued MMS at more than $18. The question in my mind is whether there is a permanent legacy of the FBT debacle, which is that the market will now factor in the possibility of future legislative risk and the price will be discounted accordingly on perhaps a permanent basis. If this is the case, I am wondering if there is any way to objectively quantify what this discount may amount to. There are all sorts of risks that all sorts of companies may face. Do these only become real in the minds of investors after something actually happens? That seems irrational. For example, Coca Cola carries the risk that the government may someday pass legislation limiting the amount of sugar allowed in soft drinks. Woolworths may someday be subjected to the challenge of a grassroots political campaign against vertical integration and duopolies. If there is a material effect of these possible challenges, then presumably they are already reflected in the share price. MMS is no more susceptible to legislative risk than it was before the Labor FBT affair. It could be argued that it is less susceptible because of the backlash against that suggestion and the damage that was done. So all that has changed, it could be argued, is that it now occurs to investors that some such thing may happen, when in the past it did not. It would seem that there are only two possible conclusions: (1) investors were irrational in the past in that they did not factor into the share price the real legislative risk, or (2) the current discounting of the MMS share price is a temporary aberration and the price will return to pre – FBT scare prices in due course. Being a shareholder, and admirer of the company, I hope for the latter.

  4. Andrew Longden

    Perhaps the market would like to see some concrete proof that the current FBT structure is safe (at least for the short-medium term).

    Assuming no surprises in the Budget, the market may have confidence in MMS once more after Tuesday.

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