Shares of ASX-200 listed finance company McMillan Shakespeare Ltd [ASX:MMS] have soared over 16% at time of writing.
The company released quite a bit of news on the ASX this morning, including their FY19 results, showing a relatively flat revenue of $549.7 million — an increase of only 0.8%.
But it was the announcement of an $80 million share buyback that seems to have investors chomping at the bit.
Shareholders appear keen to get a little more bang for their buck either by cashing in or holding on and benefiting from the greater earnings per share.
McMillan also announced a fully franked dividend of 40 cents per share, which is equal to last year but up from the half-year dividend of 34 cents.
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What is the buyback telling us?
While improving earnings per share is ideal for any company, it’s important to consider a company’s motives behind issuing a share buyback.
In June this year, the company revealed they had surplus capital, and were considering ‘further acquisitions’ where this capital could be put towards.
This is also where they first floated the idea of a share buyback.
Their net cash figure was clarified today, sitting at $106.3 million, with franking credits at a value of $128.7 million.
McMillan insist that their decision to go ahead with the buyback was an effort to maintain dividend returns of 60–70% of UNPATA to investors.
This, along with underlying earnings per share for this year being down 5.1% at 107.3 cents, provides sufficient logic for the buyback.
But what happens afterwards?
For now though the company is boasting this high cash flow, total assets are down over $30 million compared to last year, with free cash flow sitting 38.2% lower than in 2018.
It makes you wonder whether this buy back is truly for the interests of shareholders in giving them value for money, or whether it is a last feeble attempt for McMillan to add appeal to their struggling company.
McMillan struggling in a ‘challenging’ market
See, alongside the reveal of excess capital, McMillan also gave a trading performance update back in June.
In it, they announced that their Group Remuneration Services (GRS) division had ‘faced challenging conditions’ leading to ‘lower than expected volume and revenue growth’.
The company also revealed that their Australian asset management business had ‘an increase in contract extensions’ causing delays in contract income.
And their UK businesses were suffering from ‘soft market conditions and increased competition’.
At that time, McMillan downgraded their underlying net profit guidance $87–89 million, significantly lower than the then broker consensus of $92 million.
Today’s reported UNPATA falls into this downgraded range at $88.7 million, down 5.1% from last year.
Their EBITDA is also down from the year prior, sitting at $132.8 million compared to $143.4 million in 2018.
McMillan also admits their Australian and UK segments are still struggling against ‘challenging’ markets rife with ‘uncertainty’.
So perhaps the buyback spike will be the last we see in these shares for some time, particularly if markets remain challenging.
But you never know.
For Money Morning
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