McMillan Shakespeare (ASX: MMS) has today announced an $86m off-market buyback along with some strong results with FY22 normalised NPAT increasing 16.5% from FY21.
Off-market buybacks are a tax effective mechanism for returning franking credits to shareholders who most value them.
The buyback will have a $0.99 capital component, with the balance being a fully franked dividend. It will be based on a tender, with investors tendering to sell shares at a discount of between 10% to 14% below market price. Shareholders who don’t participate will still benefit from the buyback, to the extent that shares are effectively bought back at a cash discount to market price. This compares with on-market buybacks, where companies buy-back stock at market price.
We have analysed the value of the buyback for tax-exempt investors such as charities, foundations, pension phase superannuation and individuals below the income tax threshold using the market price of McMillan Shakespeare on August 29 of $13.98 – see Chart 1 below.
For a tax-exempt Australian investor, we estimate the buy-back at a 14% discount would be worth approximately $16.75 (disregarding the time value of money), representing an after-tax profit of $2.77 or 20% compared to the market price of McMillan Shakespeare on Monday. Please note that the buy-back is expected to be completed on October 24, 2022, based on volume weighted prices from the previous week.
Chart 1. Estimated value of the McMillan Shakespeare buy- back for tax exempt investors.
Source: Plato, McMillan Shakespeare buy-back announcement 29 August 2022.
The value of the buyback for other investors will depend on the tax situation of each investor.
We would expect the buyback to be of some value for 15% tax rate Australian investors, but significantly less that the 20% number for tax-exempt investors. The precise value will be determined by investor circumstances, the deemed capital value that the ATO will issue after the close of the buyback and the final buyback price relative to the closing market price.
Given that we estimate the buyback is valuable for both tax-exempt and 15% tax rate Australian investors at the maximum discount rate, and given the moderate size of the buyback relative to McMillan Shakespeare’s current market capitalisation (approximately 10%), we would expect the final buyback price to be set at the maximum 14% discount to market price.
So whilst we expect the buy-back to be quite valuable for tax-exempt Australian investors for every share successfully tendered, any scale-back will reduce the overall value of the buyback at the portfolio level.
Plato expects to tender all McMillan Shakespeare shares owned by the Plato Australian Shares Income Fund into the buyback as this fund is managed from the perspective of tax-exempt Australian investors. This means that investors in both the Plato Australian Shares Income Fund and Plato Income Maximiser Limited (ASX: PL8) should benefit from the McMillan Shakespeare buy-back. We believe opportunities such as this McMillan Shakespeare buy-back highlight the importance of tax-exempt investors like pension phase superannuants having their investments managed from their tax perspective.
Please note that this analysis depends very much on the particular tax status of the investor. We would suggest individual investors should seek professional tax advice based on their individual tax circumstances.
This document is prepared by Plato Investment Management Limited ABN 77 120 730 136, AFSL 504616 (‘Plato’). Pinnacle Funds Services Limited ABN 29 082 494 362, AFSL 238371 (‘PFSL’) is the product issuer of the Plato Australian Shares Income Fund (‘the Fund’). The Product Disclosure Statement (‘PDS’) of the Fund is available at https://plato.com.au/. Any potential investor should consider the relevant PDS before deciding whether to acquire, or continue to hold units in, a fund. The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund is available at https://plato.com.au/. Pinnacle Fund Services Limited is not licensed to provide financial product advice.
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Plato Investment Management Limited (‘Plato’) (ABN 77 120 730 136, AFSL 504616) is the investment manager of Plato Income Maximiser Limited (‘PL8’ or the ‘Company’) (ACN 616 746 215). PL8 is the issuer of the shares in the Company under the Offer Document. Any offer or sale of securities are made pursuant to definitive documentation, which describes the terms of the offer (‘Offer Document’) available at https://plato.com.au/lic-overview/ This communication is not, and does not constitute, an offer to sell or the solicitation, invitation or recommendation to purchase any securities and neither this communication nor anything contained in it forms the basis of any contract or commitment. Prospective investors should consider the Offer Document in deciding whether to acquire securities under the offer. Prospective investors who want to acquire under the offer will need to complete an application form that is in or accompanies the Offer Document. The Offer Document is an important document that should be read in its entirety before deciding whether to participate in the offer. Prospective investors should rely only on information in the Offer Document and any supplementary or replacement document. Prospective investors should contact their professional advisers with any queries after reading the Offer Document. Any opinions or forecasts reflect the judgment and assumptions of Plato and its representatives on the basis of information at the date of publication and may later change without notice. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. This communication is for general information only. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any persons relying on this information should obtain professional advice relevant to their particular circumstances, needs and investment objectives. Past performance is not a reliable indicator of future performance.