David Symons joins BusinessDay today, bringing insights from his career as an investment banker and private equity executive. Insider, his expert analysis of financial markets, will appear from Monday to Friday with regular online updates.
The likely reforms arising from the Henry review of taxation have sent fund managers scrambling to reconsider their holdings in McMillan Shakespeare.
The stock is down 4 per cent in early trade, but more severe falls look set to follow as the market digests the full consequences of possible taxation reform.
McMillan Shakespeare offers salary packaging administration and fleet management services to Australian employers. Shares in the company have doubled over the last 12 months as the business is well managed and holds a strong competitive position in a market relatively insulated from economic cycles.
However, the big risk facing McMillan Shakespeare has always been the impact of possible structural change to the taxation system. Around two-thirds of company revenue is earned from salary packaging and related services, with most of that earned from charities and hospitals.
The current taxation system allows these employers to provide up to $9000 per annum to employees tax free as reimbursement of expenses such as restaurant bills, with McMillan Shakespeare providing the systems and know-how to manage expense reimbursement.
The extent of Henry review reforms in this area is not yet clear, with speculation currently focused on charities rather than hospitals.
Nevertheless, one analyst who covers the stock commented this morning that a worst case result would see the company ‘‘lose half if not more’’ of its business.
A spokesman for McMillan Shakespeare was not available for comment.
BOARD HANGS ON
Shareholders of Energy Developments have 14 extra days to weigh up the $2.75 per share takeover offer from Pacific Equity Partners following the bidder's last-minute decision on Friday to extend its unconditional offer.
Because PEP now has acceptances from 67 per cent of the register, it would be usual for the target's board to adjust its previous ''reject'' recommendation to reflect the changing circumstances, including the bidder's ability to control the company's board and strategy.
In fact, over the past 10 years only Virgin Blue has continued to recommend the rejection of an offer after control has changed.
However, the Energy Developments board is sticking to its guns, clinging to an independent expert's valuation and the intentions of the lead institutional shareholder, IML, as the basis for maintaining that shareholders would be better off rejecting the PEP offer. It looks like PEP will have trouble shaking free the paltry $3000 of shares held by the target's chairman, Bruce Brook.
When assessing how much weight to give the recommendation, shareholders may cast their minds back over the board's performance on other recent matters.
The stand-off between PEP and Energy Developments is the latest instalment in a saga that started in July 2008 when the clean energy concern announced a ''strategic review''.
The review was expected to take three to six months, and was to ''consider a variety of options with the objective of maximising value.''
Since then, Energy Developments has delivered a slew of disappointing news. First, a corporate sale process failed to achieve a result. Next, its attempts to sell separately its US and British operations failed.
More recently, Energy Developments held discussions with Archer Capital but failed to agree on price. A second attempt at selling the British operations stumbled when a contingent liability was unearthed late in the process.
All this failure does not come cheap. Energy Developments disclosed strategic review expenses of more than $25 million for the period. This works out at a whopping 18c per share.
The Energy Developments board has suggested shareholders seek independent advice before making up their minds about the offer. That, at least, is good advice.
PRIVATEER EXITS
Early expectations that 2010 would be the year of the float were slightly deflated by Archer Capital's recent decision to hold back from an immediate float of Rebel Group.
No such delays are likely for another planned private equity exit, the float of International Study Group, now owned by CHAMP. Brokers for the float of the university access and English language provider are expected to be appointed in coming weeks.
The education sector has been kind to CHAMP, which teamed with Peterson Investments to buy the business from the Daily Mail Group for $176.4 million in 2006.
Less than four years on and float valuations of $500 million to $600 million are being suggested. That would be a strong result at a time when many private equity investments made at the height of the sharemarket boom remain under water.
Prospects for the float have been boosted by the recent share price run of a rival, Navitas, which is up about 70 per cent in six months on the back of profit upgrades and improved market sentiment.
The float looks set to be priced with reference to the lofty Navitas trading multiple of 22 times 2011 earnings per share, but a hefty discount may be required to get the float away. Study Group's business is heavily weighted towards low-margin language courses, with the result that EBITDA margins are in the high single digits, about two-thirds lower than its listed competitor.
COOL DOWN
Mutterings around the market suggest the profit upgrades announced by the likes of Computershare, Flight Centre and Collection House last week will soon be outnumbered by more subdued profit announcements from a larger group of industrial companies.
Many companies delivered solid performances in the December 2008 half-year - it was the financial sector that came crashing down in October, while the real economy soldiered on. So while the current half year should show improvement on the June half in most cases, the year-on-year comparison may not be as favourable.
Throw higher borrowing margins and currency challenges into the mix, and the looming results season may yet give rise to a pegging back of expectations.
CAPRAL ON MEND
The first tangible evidence of a turnaround at Capral, the much maligned aluminium extrusions manufacturer, emerged last week with the publication of profit guidance for the December half.
For the first time in more than five years Capral looks set to record an operating profit, with EBITDA tipped to be between $6 million and $7 million. This compares with an $8 million loss in the June half.
And analysts from Southern Cross Equities are expecting more improvement. Increased demand from the construction sector, which accounts for 60 per cent of Capral's sales, together with substantial cost savings extracted by the new managing director, Phil Jobe, and the imposition of dumping duties on a range of Chinese imports will all play a part.
According to Southern Cross, EBITDA could be as much as $35 million this calendar year.
dsymons@smh.com.au
