These Auto Firms Are on Borrowed Time

A business that lives on tax expenditures can die when they're withdrawn.

If you live by the sword, you die by the sword, and the same is true of government policy. If your business is excessively dependent on political support, it faces extreme risks from that assistance being withdrawn.

Investors in Australian auto-fleet company McMillan Shakespeare got a taster of that a few years ago. Its stock plunged 43 percent in a single day ahead of the country's 2013 elections, after then-Prime Minister Kevin Rudd proposed to abolish an obscure tax benefit for company cars.

The shares subsequently rose 52 percent in the six weeks leading up to the vote, as it became clear Rudd was certain to lose. Last month, they reached their highest since the eve of that initial announcement, when current Labor leader Bill Shorten promised to retain the existing, favorable arrangements.

Foot on the Accelerator

The market capitalization of Australia's salary-packaging companies has increased since the 2013 election

Source: Bloomberg

The protection of the industry, known in Australia as salary packaging, has been seen as such a certain thing that no fewer than three firms have had initial public offerings in as many years. As a result, shareholders now have bet about A$3.7 billion ($2.7 billion) on McMillan Shakespeare, SG Fleet, SmartGroup and Eclipx, the sector's main players.

McMillan Shakespeare gets about 47 percent of its Ebit from salary packaging, SG Fleet about 44 percent and Eclipx less than 10 percent, Citigroup analyst Ross Barrows wrote in a recent note to clients. Smaller Sydney-based rival SmartGroup derived 91 percent of its revenue from the business in 2015, according to data compiled by Bloomberg.

With another Australian election due in just over two weeks, is the industry still bulletproof?

Shorten's pledge has clearly quelled investor fears -- short interest in the four companies is at subdued levels. But with the two sides almost neck-and-neck in polls, people may be underestimating the risk from the other side of politics.

Not Captivated

No salary-packaging companies in Australia are attracting much short-seller interest

Source: Bloomberg

Note: Short interest of more than 10% is generally considered to indicate significant short selling.

The original letter of comfort from the governing Liberal-National coalition was signed before the last election by Tony Abbott and former Treasurer Joe Hockey. The first signatory has since been deposed by current Prime Minister Malcolm Turnbull in a bitter internal party battle, while the latter is out of the picture after being dispatched, post coup, as ambassador to Washington, DC.

Decline and Fall

Manufacturing volumes from major carmakers in Australia will hit zero in about 18 months

Source: Federal Chamber of Automotive Industries

Note: Ford's plants are scheduled to close in October 2016. Holden and Toyota plan to end manufacturing in Australia during 2017.

The economic context has changed, too. Abbott's promise was made at a time when the survival of Australia's carmakers was a hard-fought election issue. Rudd's policy would put "pressure on local jobs in South Australia and Geelong," Abbott told the Daily Telegraph newspaper at the time, in reference to the country's major automobile-manufacturing regions.

That ship has sailed: Ford will close its last local production line in October and General Motors' Holden division and Toyota will shut the country's final remaining car factories next year. Next month's election will probably be the last in which Australia is a carmaking nation.

The industry's better defense now is its nuisance factor. Lobbying against Rudd's proposed changes in 2013 clearly created enough of a headache for Labor that Shorten felt the need to head off the risk of a repeat this time around.

Friends With Benefits

Exemptions for the purchase of company cars are one of Australia's bigger tax expenditures

Source: Australian Government Treasury

Note: There's no record of the true value of tax expenditures, so both past and future figures are Treasury estimates.

The coalition is likely to feel the same way about an industry it's taken under its wing. While salary packaging is one of the federal government's larger tax expenditures, the A$980 million it's forecast to cost in the year through June 2018 isn't an enormous number in the context of an estimated A$18.7 billion budget deficit.

Still, election promises have a habit of lasting only until the next ballot, and while the sector seems confident of government support, there's been no letter of comfort published this time around.

As any journalist knows, when people tell you things off-the-record, it might be because they'd like to leave themselves the option to change their minds at a future date. Until the salary packagers can get something from Turnbull in writing, investors would do well to be circumspect.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling in Sydney at

    To contact the editor responsible for this story:
    Katrina Nicholas at

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