Bank of America:Changing tax legislation impairs the businessWe...

Bank of America:
Changing tax legislation impairs the business
We rate MMS an Underperform, with a PO of $6.00/share. Proposed changes to
tax legislation for novated leases by the Federal Government are likely to begin
impacting earnings immediately and materially (-52% from FY14) given MMS
reliance on this segment to generate profits and grow into new markets. We
anticipate the market’s view of the extent (duration & size) of equity impairment
will remain fluid given the Federal opposition appear to oppose the changes and a
general election is near.
We have cut estimates & valuation to reflect the ‘new status quo’. While its’ likely
the market will immediately price much of these factors immediately upon re-open
we are at Underperform due to heightened risk profile regarding the outcome of
the business.
Novated leases are central to strategy & earnings
Remuneration Services is MMS largest profit contributor, representing 75% of
FY13 EBIT ($67m/$89m). Of this Novated lease origination and management
represent over 75% of profitability. Further, MMS utilise the cross-sell and
procurement benefits of novated leasing to provide a competitive edge to its Asset
Management business, which it intends to grow materially in the private sector.
Therefore we conclude that MMS achieves over 50% of its earnings and future
growth from novated leasing.
Earnings impact is material:-52%/-64% FY14 & FY15
Our price objective is now at $6.00/share (DCF) incorporating new proposals and
estimates. In a scenario where novated leases were restored and the business
returned to normal we arrive at $10.60/share. Both scenarios below prior valuation
($15.50) due to the fluid situation that disrupts the business and increases risk
premia.

Goldman Sachs
What's changed
MMS has disclosed that novated leases contribute c.31% of revenue in
FY13 vs. our estimate of 23%. We now estimate it generates over 50% of
earnings from novated leases.
For these changes to take effect, we believe the current government would
need to remain in power following the federal election in September,
given the Federal Opposition has stated that it will not support the
changes if elected. We believe the likelihood of the changes being
implemented will be the key share price driver until a final outcome is
known.
Implications
Our base case assumption is that uncertainty hangs over the industry for
2-4 months, but that the changes are ultimately abandoned. We have
downgraded our FY14/15 forecasts by 15% reflecting minimal novated
lease originations but ongoing staff costs.
Valuation
Our 12-month price target falls 45% to A$9.45. It is based on an equal
weighting of our ‘bull’ and ‘bear’ scenarios. We retain our Neutral rating
given the high degree of uncertainty over the changes and their impact on
MMS.




With the 50% drop in price I move from a sell to a 'no view'