McMillan Shakespeare Limited
Recommendation
While most of us might merely hope they don’t do anything else dumb in Canberra, shareholders of McMillan Shakespeare rather hope the Federal Government doesn’t do something intelligent. There’s a loophole that allows public health sector employees to salary package items as diverse as dining-out expenses, school tuition, private health insurance, mortgage or rent payments, personal loan repayments, grocery bills, telephony, venue hire, flat screen televisions, fridges and holidays—allowing employees to use pre-tax dollars for such expenses while those working outside the health system must use post-tax dollars for the privilege.
The policy is clearly discriminatory and more than a little asinine. It might be justified as an offset to the below-market salaries of many in the health sector, but both employees and the government could win if wages were raised and loopholes closed—by at least the sum total of paperwork, expenses and form-filling effort required within the current system. In fact, this is exactly what the Henry review of taxation recommended a few years ago, subsequently ignored by government. Should they ever come to their senses, though, McMillan Shakespeare will be a clear loser.
The company is the market leader in managing these salary packaging schemes. Almost three-quarters of its net profit comes from its Group Remuneration Services business, which is heavily reliant on the health sector and non-profit sector (another industry than enjoys similar loopholes). Group Remuneration Services generates EBIT margins in excess of 40%, a whopping figure.
Now we’re not denying McMillan Shakespeare its past success—the company is well run, generates extremely high returns on capital and has made long-term shareholders a fortune. Should the rules remain stable, then more success is probably on the horizon. But while it sometimes seems like Canberra is incapable of making an intelligent decision, it would take only one and this company would be reeling, seeing much of its business evaporate. It’s not a risk we’re comfortable taking. AVOID.