We lower our fair value estimate for no-moat McMillan by 5% to...

We lower our fair value estimate for no-moat McMillan by 5% to AUD 18 per share, mainly due to lower revenue growth expectations. Fiscal 2024 results were below our forecasts. Underlying net profit after tax and acquisition amortization increased 38% but missed our forecast by 4%. EBITDA margins improved across all segments, but not as much as we hoped.

McMillan benefited from rising novated leasing volumes and higher novated yields (largely a function of vehicle prices), and has likely pre-emptively trimmed costs ahead of an earlier-announced contract loss, which ended on June 30, 2024. We see fiscal 2024 as a cyclical high point for earnings and margins, with a likely softening in the short to medium term.

Shares are fairly valued at current prices. As expected, management alluded to increasing vehicle supply and pricing competition. This indicates that future volume growth in the novated leasing and salary packaging segment (which accounts for 74% of EBITDA) will come at the expense of yields and account fees.

The firm is leaning on cost reductions, but this often accompanies or precedes revenue declines, so we don’t consider it a key driver of earnings growth. Notably, revenue for fleet management (17% of EBITDA) and plan support services (7% of EBITDA) fell below our expectations, with cost control underpinning their earnings growth. We think it’s likely that both divisions will require some reinvestments to support revenue—despite McMillan’s cost-reduction agenda—leading to mild revenue growth but also lower margins than in fiscal 2024.

On the positive side, the increased product take-up indicates successful cross-selling, reducing the risk of significant customer losses as long as McMillan maintains competitive fees and good customer service. Continued demand for higher-priced electric vehicles—versus internal combustion engine vehicles—supported by favorable government policies is positive for margins.