McMillan may never recover

Any company that relies so heavily on a tax break for its earnings should attract a hefty discount.

It has become the great Federal Election proxy. But the risk associated with McMillan Shakespeare's (MMS) business model now has become painfully apparent.

The car leasing and salary packaging operation was trading north of $18 when the Prime Minister Kevin Rudd announced changes to the Fringe Benefits Tax in the early phase of the election campaign in mid July.

Since it resumed trading in late July, it has leapt from $7 to yesterday's $13.14 close as the prospects of a Coalition win on the weekend lifted and after yesterday's announcement from the Opposition that it would not implement the Rudd Government's proposed changes if it assumes power (see McMillan Shakespeare: tragedy or farce?).

That announcement yesterday helped drive McMillan Shakespeare's stock 8.5% higher.

From an operational perspective, the uncertainty of the past few months may help lift McMillan Shakespeare earnings. Unlike many of its competitors, It has resisted the urge to lay off large numbers of its staff, thereby putting it in a stronger position with the possibility that it may increase market share and lift revenue.

But from the viewpoint of an investor, the cat is now out of the bag when it comes to the risks associated with the business.

Any business that relies on the whim of government regulation – and particularly a tax break – is exposed to the possibility of that tax break being removed.

That increased risk profile will weigh heavily on McMillan Shakespeare's stock price and investors – at least in the short to medium term – are likely to attach a discount to the company, inhibiting its ability to return to its once lofty premium.

While this week's assurances from the Opposition that it will maintain the tax break should not be dismissed, assurances from politicians of any persusasion should be treated with caution, particularly when it comes to cars, a domestic industry in obvious long term decline.

Any future government looking to shore up its budget position will find it difficult to argue that some taxpayers should fund other taxpayers to buy new cars.

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