McMillan's growth potential fundamentally altered: Citi

The investment bank thinks McMillan's business is under a cloud.

Investment bank Citigroup has downgraded McMillan Shakespeare after the federal government announced regulatory changes to the fringe benefit tax yesterday.

Citi dropped its recommendation to "neutral" from "buy" and lowered its price target on the stock by $1.87 to $16.62 on the grounds that the changes will have a "fundamental change in the leverage of its business model."

"We see [the] announcement as likely to fundamentally change the growth potential and future profitability of MMS," Citi said.

Yesterday the federal government announced it was moving the carbon tax price from a fixed to floating price one year earlier, creating a shortfall of around $3.8 billion. The hole in the budget is mostly to be filled by eliminating the 20% fringe benefit rate that is used to claim fringe benefits on cars – which is a core component of McMillan's novated leasing business.

The investment bank listed three negative implications for McMillan: that eliminating the flat rate will increase the complexity of the benefit, reducing its appeal; the tax concession to personally use employer-provided or salary-sacrificed cars will be removed, increasing the burden of proof required to show the vehicle is being used for business purposes; and that the new policy won't differentiate between taxable and tax-exempt businesses, potentially harming McMillan's strategy to target higher-value customers.

McMillan plummeted 14.7% to $15.36 yesterday before it was granted a trading halt. 

"We believe the changes if implemented will have a material impact on the company's business," the company said in an announcement to the Australian Securities Exchange.

McMillan is part of the Uncapped 100.

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