CHRIS BATCHELOR | From Stockopedia

In this episode I’m joined by Chris Batchelor from Stockopedia to take a closer look at how they identified one of their highest ranking stocks McMillan Shakespeare (ASX:MMS).

McMillan Shakespeare Limited is an Australia-based provider of salary packaging, novated leasing, disability plan management and support co-ordination, asset management and related financial products and services.

The Company operates through three segments: Group Remuneration Services (GRS), Asset Management Services (AMS) and Plan and Support Services (PSS). GRS segment provides administrative services in respect of salary packaging and facilitates the settlement of motor vehicle novated leases for customers. It also offers ancillary services associated with motor vehicle novated lease products.

Its AMS segment is engaged in financing and ancillary management services associated with motor vehicles, commercial vehicles and equipment with operations in Australia, New Zealand and the United Kingdom. Its PSS segment is engaged in providing plan management and support coordination services to participants in the National Disability Insurance Scheme (NDIS)

MMS was one of the inaugural stocks picked for the NAPS Australia and New Zealand portfolio at the start of the year.

What is the NAPS portfolio?

No-Admin Portfolio System (NAPS) has been running in the UK for the last eight years and demonstrated market beating performance.

NAPS is a 20 stock portfolio from the highest StockRank™ stocks, diversified across sectors, rebalanced annually. It’s a “select once, leave for a year portfolio” that requires no more than an hour to put together.

Stockopedia decided to set up a portfolio for the ASX/NZX market on 1 Jan this year to track how it performs locally.

Why:

It had a StockRank of 98. And was selected as one of the two top ranked stocks in the Financials sector.

Change in the Quality score occurred following the releaseof the half year results in Feb. The Quality score is calculated based on information in the Financial Statements and therefore only changes each half year when new information is released.

Generates high ROE and return on capital

Strong Margins

All of these metrics improved with the half year results

The Value and Momentum Ranks include the share price as partof their calculations and can therefore potentially change on a daily basis.

All else being equal, the value rank will decline as theshare price increases. We have witnessed this over the last six months with MMS.

What has happened since?

Share price has risen by 34%, plus investors would haveearned 6.15% in dividends grossed up to include franking credits.

It has been the third best performing stock in that initial NAPS portfolio (behind LAU and LYL).

Stockopedia prepared another portfolio on 1 July using the same methodology, and MMS was again one of the top two financial stocks.

EPISODE TRANSCRIPT

0:00:01 - Chloe
Shares for beginners. Phil Muscatello and Finpods are authorized reps of Money
Sherpa. The information in this podcast is general in nature and doesn't take
into account your personal situation.

0:00:12 - Chris
Different investors do have different philosophies on that. A value investor, a
really true blue value investor, would say yeah, always look to buy stocks at a
lower price. A momentum investor says strong stocks keep getting stronger, and
so they would look to buy stocks that are actually increasing in price. What
we've found is combining all of those elements. Really is a good approach

0:00:32 - Phil
G'day and welcome back to Shares for Beginners. I'm Phil Muscatello. Today I'm
joined by Chris Batchelor from Stockopedia to take a closer look at one of
their highest ranking stocks McMillan Shakespeare ASX:MMS G'day, chris.

0:00:48 - Chris
G'day, phil, great to be with you today.

0:00:51 - Phil
Yeah, thank you very much for coming on and discussing a particular stock that
seems to be ticking a lot of boxes for you.

0:00:58 - Chris
Yeah, it's a really interesting company, this one. I'm looking forward to
getting into it.

0:01:02 - Phil
So tell us about McMillan Shakespeare. Apparently well, they operate across
three segments group remuneration services, asset management services and plan
and support services. What does all that mean?

0:01:14 - Chris
Yeah, exactly. So yeah, when you read those points you sort of think what on
earth does that mean? So I'll run through each of the three key areas and just
explain what they are. So asset management services is their biggest
contributor to revenue, although not their biggest contributor to profit, and
what that means is two components to it. One is your typical vehicle fleet
management system. So big companies or government utilities, those types of
businesses, have big fleets of vehicles. So McMillan Shakespeare managed those
vehicles, they source them, they look after all the servicing, et cetera, et
cetera, and then they sell them at the end of their life. The other component
is what they call asset finance aggregator. So what that means is they have
access to a large panel of lenders and then, on the other side, a lot of
finance brokers come to them when they need to source a loan for a client, and
they match the two up and find the best deal for that finance broker. So that's
also the other aspect to that asset management.

Now, moving on to the group remuneration services, what that means basically is
two components to it salary packaging and novated vehicle leasing. So that's
where the average person, an employee of a company, wants to lease a vehicle,
and so they'll organise all of that for that person. Often, small businesses,
as well as larger businesses, will offer a vehicle as part of the salary
package for their employees. So the last segment is what they call plan and
support services. Now this basically comes down to the NDIS, or National
Disability Insurance Scheme People who are involved or recipients of the NDIS.

They're divided into two groups One, what's called self-managed, and the other
is where they need to have a plan manager for them, and there's 573,000 people
at the moment receiving NDIS support, and about 58% of those people actually
require plan management. So, as you can imagine, these are people that have
various challenges and disabilities, and so they need someone to help them
manage their access to this financial support. Mcmillan Shakespeare provide
that service. Now, it's a very fragmented market. Lots and lots of people are
providing a similar service. They've managed to get to 5.1% market share, which
makes them the second largest provider in that space, but at the moment it's
still only a very small component of their overall revenue at about 8%, but it
is growing.

0:03:42 - Phil
So one of the things that we hear about companies is that they identify a
problem and then provide a solution. What do you think the solution is that
they're providing? What's the whole that they're plugging?

0:03:53 - Chris
Vehicle leasing is the main component of their business and that's been
obviously a service that's been around for a long time. But it provides
companies in particular with the ability to give their staff something
different in terms of packaging up their salaries, and vehicle leasing tends to
be quite an effective way to purchase a vehicle. So a lot of people are
attracted to that, just from the financial incentive perspective and also, of
course, with the big companies, they need to manage a big fleet of vehicles,
but that's not their core expertise. They don't want to be doing that
themselves, so they outsource that to a company like McMillan Shakespeare.

0:04:30 - Phil
So tell us about the sector. What is the sector that the company operates in
and what's the market cap?

0:04:37 - Chris
The market cap of this business is 1.2 billion, so it is a significant
business, although it may surprise listeners to know that that is actually
still classified as a small company. What I would explain here is I'd probably
go into the whole vehicle leasing market because that's really the key
component to what they do. They come at it from a couple of different angles,
but that's really the crunch of it. That has been an interesting component.
I'll assume most listeners have a rough idea of what vehicle leasing involves, but
it's been witnessed to some unusual effects over the recent years. Firstly,
australian new car sales have actually been in decline for quite a few years
and that's been a trend we've witnessed as more and more people either don't
have an interest in having a vehicle or only have one vehicle per family. My
son, 17, has no interest whatsoever in getting his driver's licence. It seems
to be the way of the younger people. But what we witnessed in the last 12
months, is that actually turned around? What we don't know is is this just a
short-term pick up or is it indicative of a longer term change? Obviously,
covid did bring around some changes with vehicle ownership. A lot of people
were frightened of going on public transport for a period of time there, a lot
of people moved to regional areas where, of course, a car is more important and
more of a necessity. In those areas we have seen an uptick in new vehicle
sales, so it'll be interesting to see whether that plays out as a longer term
trend.

The other thing that occurred, largely as a result of the pandemic, was used
vehicle prices went somewhat crazy. We started to see the situation and we're
still seeing it today where used vehicle prices are much higher. They're
actually at record levels than what we would expect. There's two factors in
that. One is that at the start of the pandemic, new vehicle production simply
either ceased or really got cut back. Now that we're about three years on from
that, all of those vehicles that would have been coming onto the secondhand
market they're not around. There's a lot more pressure for people wanting to
buy a used vehicle. There's just not that many of them around. The other
aspect, of course, was that with that cutback in production of new vehicles, a
lot of people you had long, long waiting times. If someone wanted a vehicle
quickly, they just went to the used vehicle market. It was simply a quicker way
to get one. So that started to taper off, but it's still very high and it will
take some time before those prices come down.

Now the other aspect is a government based one, and what we find with the
vehicle leasing industry and and salary packaging in general is that there is a
lot of what I call regulatory risk.

So a lot of these structures depend on Tax laws and of course, tax laws can
change at the whim of the government in power at the day, and so right now
that's working in the favor of the vehicle leasing companies.

From the point of view of electric vehicles, the government has put in place a
scheme to make it far more attractive To lease an electrical lower mission
vehicle when compared to a regular internal combustion vehicle, and so we're
seeing a really strong pickup in demand for these EVs. You're probably noticing
it around you as more and more EVs on the road and, in particular, if you're
leasing an EV, what it works out if you wanted to lease, say, a $40,000 Mazda
when you could actually lease a $66,000 Tesla 3 for the same annual outgoings
and so that has made that vehicle suddenly and and similar vehicles to it
Suddenly very attractive from a financial perspective. So we're seeing a big
uptake, literally more than double in the last quarter in terms of the order
intake for those types of vehicles. That's, the sectors that they're operating
in and the trends that are really impacting them at the moment.

0:08:40 - Phil
So tell us about how Stockopedia identified this company last December.

0:08:44 - Chris
Yeah, okay, so. So what we do at stockopedia is we have a very automated
process to our stock selection. Our tool is a very quantitatively driven tool,
which means that basically, we process lots and lots of numbers and we look for
Trends within those numbers to try and identify which are the the companies
with the most attractive prospects. And so what we did at the start of the
year? We put together a portfolio we call it the naps portfolio, which stands
for no admin portfolio system. Basically, it's a set and forget type of
portfolio, so we set it up on literally on the first day of the year and then
we don't touch it until the end of the year where we'll review it and readjust
it. And so what we did to identify the stocks for that portfolio is we went
through all the stocks in our system, which is every stock on the ASX and the
NZX, and and identified which ones have the highest scores.

Then we just apply a couple of fairly elementary screens. One is to make sure
there's enough liquidity in the stock and the other, really important one, is
to make sure that we have diversification. There's 10 key sectors across the
market. We pick 20 stocks, two from each sector, except we only took one teleco
and one utility, and we added in real estate trusts. So from that in the
financial sector, mcmillan Shakespeare was one of the top two stocks that came
up there in terms of its score. It had an overall score of 98. And so we then
chose that. Pretty simple really. We chose that for our portfolio based on that
high score, and have been tracking it ever since.

0:10:28 - Phil
Start taking your investing seriously and elevate your research with
Stockopedia. Stockopedia are pleased to offer a special deal to listeners of
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stockopediacomau slash SFB for your free trial and special discount offer.
Start making data-driven decisions today At Stockopedia. Stockopedia Limited is
an authorized rep of Daylight Financial Group of Priotry Limited, AFSL number
521404. This information is not intended to constitute advice. Read the FSG on
the Stockopedia website for more detail. Can I just dig a little bit deeper in
there? So you're taking these numbers from the company report, aren't they?
There's no magic about this. This is just the numbers that are published when
they release their half yearly or yearly reports. That's the case.

0:11:36 - Chris
That is the case. The magic comes in terms of how we then process those
numbers. What we do is we use what is called factor investing and we look for
key factors. Now there's three key factors that have been shown historically to
drive share prices. They are the quality of a company, the value of a company
and momentum. We calculate ranks across those three aspects quality, value and
momentum. Then we calculate an overall stock rank which basically looks at the
scores for each of those and combines them to come up with an overall score.


I mentioned that back in December Macmillan Shakespeare had an overall score of
98, but the components of that were a quality rank of 97, a momentum rank of
99, but a value rank of 80. That value rank 80 is still very good. That means
it's in the top 20% of the market, but obviously it's not 98, 99 area. Overall,
a score of 98 simply means that it's in the top 2% of stocks on the market,
taking those three factors into account. Arriving at each of those factors,
there's about six ratios roughly that go into each of those components. We're
calculating all of that every day. The quality is based on the financial
statement, so that comes out every six months. But value and momentum. They
change each day with the share price and also based on forecasts from market
analysts.

0:13:11 - Phil
Tell us what's happened to the price of the stock since?

0:13:14 - Chris
Well, it's been a real standout. It's gone up 34%. When we added it to the
portfolio it was which, by the way, is a hypothetical portfolio it was $13.44.
It's currently over $18,. I think 1828. Yes, 1828, yesterday's close. It's
really performed strongly. Then, on top of that, you've got a really good
dividend which just for the half year, would have earned you 6.15% in grossed
up. Grossed up includes franking credits. That's an outstanding result of over
40% return in just over six months.

0:13:52 - Phil
You've put together another portfolio on the 1st of July and it's still there
as a buy.

0:13:58 - Chris
That's right. We thought it would be an interesting exercise to run the same
style of portfolio at the start of the financial year. It went through the same
process Again. Macmillan Shakespeare came up as one of the top two financial
stocks In the portfolio that we've set up on 1st of July. It's also in that. So
yeah, that's still ticking all the boxes.

0:14:21 - Phil
Yeah, it's interesting for me, having come from a non-financial background,
that intuitively you think you should be buying companies that are dropping in
price and getting a bargain, but in fact it's often the case where you do
better with companies that are showing strength.

0:14:37 - Chris
Yeah, that's an interesting point, and different investors do have different
philosophies on that. A value investor, a really true blue value investor,
would say, yeah, always look to buy stocks at a lower price. A momentum
investor says strong stocks keep getting stronger and so they would look to buy
stocks that are actually increasing in price. What we've found is combining all
of those elements really is a good approach. It's not for everyone and some
people will prefer to stick to a value strategy, but overall, if you don't want
to take the burden of having to process all that information yourself, then
this provides you with diversity. What we find in markets is that value
strategies perform really well at certain times and the momentum strategies
perform well at other times, so combining them tends to even out those highs
and lows.

What we've found, looking at it, as you might expect, with the price having
gone up over the last six months, yes, the value rank has come down. I mentioned
it was 80 back in December or it's now 74. 74 is still very respectable that's
top 26% but of course it is dipping, and that's for the obvious reason that as
price goes up, value comes down. But value doesn't necessarily come down in a
linear fashion, because forecasts may also be rising, and in this case they
are. So that means that your value metrics are declining because of the
strength in the price and they're not declining just on a linear scale, because
the forecasts are also going up and the expectations for profits etc. Are going
up.

0:16:16 - Phil
So what are you keeping an eye on that could affect the business model?

0:16:19 - Chris
Yeah, well, there's a couple of things with this company and with companies of
this nature that you need to be really aware of.

0:16:25 - Phil
There's always a downside, isn't? There, yeah, that's it, or the possibility of
a downside.

0:16:30 - Chris
That's right I mean if it was all easy, we'd all be well-few, best laid plans.
But, as I mentioned a bit earlier, what are the keys with these types of
business is a lot of their success hinges on government policy. Now, right now,
I talked about that favorable tailwind where the current Labor government have
implemented these policies to make EVs really attractive. For those of us who
can remember the election of 2019, the Labor Party who were in opposition at
the time were proposing certain policies around salary packaging that would
have been really detrimental to McMillan, Shakespeare and these types of
companies, and so a lot of those companies sold off at that point in time
because it was going to become much less attractive to do salary packaging and
leasing of vehicles. Now, of course, labor didn't win that particular election
and so they didn't have to deal with that issue. But that's the thing You've
got to be awake to regulatory risk. Now, right now, I mentioned they've got
this strong and growing part of their business that supports people accessing
the NDIS. That's great, but, as anyone who watches the news knows, the NDIS
budget is really growing at an unsustainable rate, and so there's all these
reviews and so forth looking at how can they rein in this NDIS budget, which is
getting out of control, and so you can expect that there will be significant
changes in the coming years to how NDIS is managed, and we don't know what
those changes will be at this point in time. But that will have some impact, no
doubt, on their business, and it may not be a positive impact. So something to
be aware of.

A couple of other things that I'm just keeping an eye on. We talk about growth.
Obviously we're looking for revenue growth and earnings growth. Are they
happening? But you would call them steady, not exceptional. It's not growing at
a strong rate. So when you see the share price growing at a really strong rate
but revenue is not growing as strong and profits not growing as strong, you
have to ask some questions about okay, is it getting ahead of itself? I don't
think it is just yet, but I'm just conscious of that. It's not a high growth
business in terms of revenue.

And the other thing that I'm also conscious of is the debt levels. I'm pretty
conservative in my approach to investing, so I look for companies with low debt
levels. This company has a net gearing of 83%. On the face of it, you would say
that is quite high, but then you also need to dig into understanding the nature
of that debt. And then, in the case of this type of company, a lot of that debt
would be secured debt, so it's secured against the vehicles that they're
leasing, so they're not necessarily highly exposed in terms of their debt,
despite the fact that they have a lot on their balance sheet. But, again,
something to keep a close eye on. So, yeah, those three factors are things you
really want to be cognizant of if you're considering an investment in McMillan
Shakespeare.

0:19:39 - Phil
So how can listeners find out more about Stockopedia Chris?

0:19:42 - Chris
We do have a special offer for listeners of Shares for Beginners. You can go to
our website, why.stockopedia.com/sfb, and there's heaps of information on the
website there all about our ranking system, how it works, why it works. There's
videos as well that people can watch to get some good insights into how we
operate. And we do have a special offer for listeners of Shares for Beginners
and that is 25% off $125 off at this point in time. So I encourage you to have
a look at that and see if it's a tool for you. It's really good if you're a DIY
type of investor, because it gives you the tools.

We don't give you recommendations. We're not saying buy this, sell that, but
what we are doing is giving you tools to make it easy for you to understand
what is driving this share price. Is this company really powering ahead, based
purely on momentum, or is it a really great value stock? What's the quality of
the business like? Is it a high quality business or is it a low quality
business that's experiencing some moment in the sun for various reasons? So
it's really helpful to understand things and you can do that. I won't say at a
glance, but fairly quickly.

0:21:06 - Phil
That's great, chris, and I believe that offer ends on July 31.

0:21:10 - Chris
That's correct. Yeah, so do get along if you're looking to take advantage of
that.

0:21:15 - Phil
Chris Batchelor, thanks very much for joining me today.

0:21:18 - Chris
Thanks, Phil. It was a pleasure to talk to you and your listeners.

0:21:21 - Chloe
Thanks for listening to Shares for Beginners. You can find more at sharesforbeginnerscom.
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