Is McMillan Shakespeare deep in value-play territory?

Having witnessed McMillan Shakespeare's (ASX: MMS) revenue leap 34% to $243.5 million – with underlying net profit after tax but before amortisation of acquisition intangibles up 34% to $41.8 million at half year –  the market has sufficient proof that the salary packing industry leader's post-FBT shenanigans, that took the share price on a wild ride are well and truly behind it.

What was also particularly pleasing about the interim result was free cash flow which was up 54% to $53.9 million.

In the absence of any overtly negative news, McMillan Shakespeare's share price appears to have been caught up in the panic selling earlier this year, especially considering that earnings per share (EPS) growth has been excellent over the past five years, and is expected to remain so.

EPS of $0.92 in 2015 is expected to grow to $1.04 in 2016, $1.13 in 2017, and $1.20 in 2018.

Equally encouraging is the fully franked interim dividend of 29 cps that shareholders will receive on April 15, which represents a 16% increase on the 25 cps received last year, and analysts are forecasting a dividend yield of 6.8% in 2016.

McMillan Shakespeare provides salary packaging, novated leasing, and fleet and asset management through a portfolio of brands, including Maxxia, RemServ, Interleasing, and Holden Leasing.

While McMillan Shakespeare's cash flow ratio – which measures the quality of reported earnings – at 0.57% isn't particularly flash, the stock is making efforts to reduce its high net-debt to equity.

Following on from buying UFS on 31 July 2015 and Anglo Scottish on 4 November 2015, further acquisitions for this stock are always likely.

Management have a good track-record in acquiring businesses that are complementary to its core competencies, and its asset management business is likely to consider further selective acquisitions in the UK.

But with a funding gap of $303 million, and forecast net-debt to equity of 78.97% in 2016, investors should watch carefully how future acquisitions are going to be funded.

Initial acquisition synergies have already contributed to the growth of profitability across the group, while and further synergies are expected to be realised in the near to medium term.

The company is also targeting further organic growth within its group remuneration services (GRS) business via existing clients and new business.

Given that the share price is trading on a 22% discount to its intrinsic value, a forward price to earnings (P/E) ratio of 10.5, around 35% lower than its peak of $17.55 in July 2013, and at a 24% discount to 12 month targets of $15, the stock appears to be attractively priced.

Based on the positive earnings outlook and the future optimisation of recent acquisitions – which could easily trigger a stock re-rating – McMillan Shakespeare does appear to be deep in value-play territory, there's every likelihood that the discount to intrinsic value will progressively close.