Finance group McMillan Shakespeare’s share price has almost halved after it said the Rudd government’s flagged changes to fringe benefit tax (FBT) laws had created uncertainty

The business of loopholes

July 22, 2013

Nathan Bell

On just about every number you care to inspect, McMillan Shakespeare is a stunningly effective business. In the float in 2004 the company raised $10.5 million at 50¢ a share. It last traded at $15.36, an increase of about 3000 per cent in nine years. The company’s return on equity has consistently been around 40 per cent, juiced up somewhat by debt, and it makes operating margins in the high 20s. Revenue since listing has increased from about $66 million a year to more than $300 million in 2012. It’s written in the stars that such businesses become darling stocks, and McMillan duly did – at least until last Tuesday. On that day it was announced that, horror of horrors, salary-packaged new cars will only get a fringe benefits tax break if a logbook can prove they are used for, you know, business. Before entering a trading halt, the company’s share price tumbled. McMillan is in the salary-packaging business, exploiting loopholes cleverly, systematically and legally.In a blog post titled ‘Three darling stocks to sell’, my colleague Steve Johnson of Intelligent Investor Funds, explained it thus:

“A friend of mine has managed to get his tax rate down close to zero. Every time we go out for a meal he keeps the receipt and claims it against his tax. He does that often enough and with enough people to get deductions against the vast majority of his income – and there’s nothing dodgy about it. [The law] allows public health sector employees to incur all sorts of expenses including, according to McMillan Shakespeare’s website, one’s ‘mortgage, rent, school tuition fees, private health insurance or even a personal loan repayment’.”

The situation has all the warts and wrinkles of the timber plantation sector, once also the focus of much love. Timber plantation companies appeared to be in the business of selling trees but what they were really flogging was tax deductions.

McMillan Shakespeare does much the same thing, finding loopholes and charging a fee to show people how to walk through them.

Either very few brokers picked this up, or they chose to ignore it. As former Citigroup chief executive Charles Prince said, when explaining how the world’s biggest bank from 2005 got pulled into the global financial crisis: “As long as the music is playing, you’ve got to get up and dance.”

Some of us, like Intelligent Investor’s Gareth Brown, don’t like dancing.

In reviewing the company last January, he said, “While most of us might merely hope [the federal government] doesn’t do anything else dumb in Canberra, shareholders of McMillan Shakespeare rather hope it doesn’t do something intelligent.”

Last Tuesday, against all expectation, it did. Plenty more loopholes remain for McMillan to exploit but for how much longer is anyone’s guess.

And the lesson? Not one of McMillan’s seductive financial ratios would give you the faintest hint that this billion-dollar company could be wiped out with the stroke of a pen.

The most important fact to understand about this business cannot be slotted into a black box computer program or a spreadsheet, which is where so much of what passes for “analysis” occurs these days.

Investing is not a science; there is no certainty and much ambiguity. Moreover, it involves those complex, unpredictable beasts known as humans.

If you don’t first understand how a business makes money and who’s running it, the numbers won’t enlighten you, and they may well have the opposite effect.


Fleet car firm’s share price halves

July 25, 2013 – 11:48AM AAP

Finance group McMillan Shakespeare’s share price has almost halved after it said the Rudd government’s flagged changes to fringe benefit tax (FBT) laws had created uncertainty.

After emerging from a week-long trading suspension, its share price crashed by 48.05 per cent, or $7.37, to $7.99, wiping $549 million from its market value.

McMillan Shakespeare’s request for an extension to a trading halt was rejected by the Australian Securities and Investments Commission.

In a statement, it criticised the government’s decision last week to tighten FBT guidelines on car leasing and salary-sacrifice packaging.

“The proposed changes, which abolish the 28-year-old practice of being able to rely on the statutory formula method to quantify the amount of FBT payable on employer provided motor vehicles … is creating disruption within the industry and is expected to lead to an unknown and unquantifiable decrease in demand for novated leases and an adverse impact to the business overall,” it said.

On its website, McMillan describes itself as a provider of salary packaging and vehicle leasing administration.

While Treasurer Chris Bowen’s proposals are yet to pass parliament, McMillan said the changes would have a “material adverse impact” on the company’s future earnings.

Chief financial officer Mark Blackburn said McMillan would suspend all communication with investment analysts, shareholders and the media until after the election “unless the position becomes clearer prior to then”.

McMillan is expecting a net profit of between $61 million and $63 million for fiscal 2013, representing a 15 per cent increase on the prior financial year.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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