McMillan Shakespeare's dramatic tragedy

The novated leasing company has plummeted as investors flee in the face of the federal government's planned FBT changes

McMillan Shakespeare (MMS) suffered its worst fall on record when it emerged from a week long trading halt following the government’s shock changes to tax benefits on cars.

Management is not only hunkering down in the wake of the surprise tax changes made by the federal government, but it is putting up the iron curtains as well.

The stock plunged 55.7% to $6.80 in early trade.

The salary packaging company said it was unable to work out the financial impact of the fringe benefit tax (FBT) on motor vehicles and it would cut off all communications with analysts, shareholders and the press.

However, the company did say that revenue from upfront and annuity group remuneration services payments on novated leases will be directly impacted by the tax changes (see John Abernethy's McMillian Shakespeare: tragedy or farce).

The loss of upfront payments has the most significant impact on profitability as these payments could virtually come to a halt. Upfront revenue accounts for nearly a quarter of the expected group revenue, or $81 million.

Revenue from annuity payments is estimated at $23 million but the decrease will be over a number of years as novated leases mature or are terminated.

The impact from the loss of these income streams will be more acutely felt on the bottom line as management believes these businesses generate net profit margins above the 30% average of the division.

Further, the question of whether McMillan Shakespeare will remain within its debt covenants is still up in the air even though management pointed out that its current interest cover ratio of 9.2:1 is will ahead of the required 3:1 condition.

Bank of America Merrill Lynch is urging investors sell the stock with a price target of $6 a share.

McMillan is part of the Uncapped 100.

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