Automotive Holdings (AHG) $3.68
Such is the fragmented nature of the $10 billion car dealership industry that the biggest dealer chain – the Perth based Automotive Holdings – still only accounts for 6 per cent of the market.
But with an estimated $300m war chest following the sale of its refrigerated logistics (RL) division, AHG is expected to open its cheque book at a time when asking prices for dealerships are under under pressure.
In building up a freight business through a series of acquisitions, management under former CEO Bronte Howson argued that the operation provided a hedge against the cyclical nature of the car industry.
But under new CEO John McConnell, the board had been quietly pondering divesting the RL arm without actually putting up the ‘for sale’ shingle.
Opportunity beckoned last month with the Hong Kong HNI International offering $400m – a figure higher than market expectations even though it included $120m of finance leases.
McConnell says the division had been recovering already after some tender loving care. As it happened, HNI was willing to stump up for the upside of better future performance.
In 2016-17 RL contributed $35.1m of AHG’s underlying earnings, 20 per cent of the total.
After the sale goes through in the June half of next year, AHG will have over-an-odds exposure to the subdued but stabilising WA car market.
Of AHG’s 110 car dealerships, 37 are in WA and it gleans 30 per cent of revenue from the west.
As well as hoping that cashed up fly-in, fly-out ute buyers and Peppermint Grove wheeler and dealers return to the showroom floor, AHG needs to cope with the industry-wide showroom behaviour that attracted the ire of the Australian Securities and Investment Commission.
The regulator in September banned ‘flex’ commissions on financing, by which dealers would charge an interest rate over and above the base rate set by the financier and split the difference with the lender.
In July, the regulator also outlawed a number of less than useful insurance policies sold on the showroom floor, such as tyre and rim damage cover the insurers had a habit of knocking back if the owner wasn’t the driver.
AHG discloses the insurance changes will cost $15m of earnings before interest and tax in the current year – about 10 per cent of total. But the company is less affected by the ‘flex’ ban and expects to at least partly offset the lost earnings with cost cutting and increased volumes.
Given the regulatory moves will be felt across the board – and more so by the Dodgy Brothers Autos of Parramatta Road – they’re expected to spur a fresh round of rationalisation in an already hot market.
According to KPMG’s annual comparison of the listed auto dealers: “dealership transcations have reached a fever pitch and will continue rampantly for the next 24 months.”
At the same time, more car lots – which tend to be in prime locations – will be turned into apartments.
With its RL proceeds, AHG is in the acquisition fast lane. Then again, the board could do the time honoured thing and return funds to shareholders via a special dividend, thus distributing $123m of franking credits.
Or could it do both. “It’s not a case of either/or,” McConnell says.
McConnell believes population growth will continue to support the new car market. “It won’t be double-digit growth but it will be low single digit growth in terms of fundamental demand from the market.”
While national car sales are at record levels, the WA market is 25 per cent off the pace and has declined for the last four years. But with an older fleet than the national norm, the WA market should grow faster than elsewhere now that the mining sector is getting its groove back.
AP Eagers (APE) $7.85
While AHG generates almost twice as much revenue as nearest rival AP Eagers, the Brisbane based Eagers has a market cap of $1.5bn compared with AHG’s $1.21bn.
Eagers also trades on an ebitda multiple of around 14 times, compared with nine times for AHG. However the comparison is somewhat blurred because Eagers owns 23 per cent of AHG and, unlike AHG, Eagers has an extensive $300m property portfolio.
In theory, AHG’s logistics sale should rerate the company closer to that of the sparsely traded Eagers, 37 per cent owned by Nick Politis. And given Eagers’ AHG stake is already worth $280m, the number one Roosters fan would be happy to toast the success of his rival.
Eagers has also suffered the home-town blues because the Queensland market has also lagged: the company reported record earnings of $49.3m for the first (June) half, but one broker estimates dealership underlying earnings declined as much as 17 per cent.
In that half, the overall new car market edged up 0.2 per cent, to just under 600,000 jalopies. The company believes while the sector has run hot for three years now, sustained low interest rates and sharp deals supported by the manufacturers mean it may have some way to run.
As a chuffed CEO Martin Ward notes, the company has never failed to pay a dividend in its 60-year listed life.
With Eagers deriving 45 per cent of its revenue from Queensland, Eagers similarly poised to benefit from the mining recovery and buoyant tourism conditions.
Autosports Group (ASG) $1.92
Motorcycle Holdings (MTO) $5
For investors seeking a touch of automotive class, Autosports operates 34 eastern seaboard dealerships covering 14 prestige brands.
While Autosports hasn’t been immune from the soft market conditions or the regulatory crackdown, the acquisitive company has been motoring along nicely since listing in November last year.
Revenue grew 14 per cent to $1.44bn in 2016-17, with earnings of $26.8m slightly exceeding prospectus forecasts.
“The result was delivered in spite of a new car market that grew below trend rates,” says CEO Nick Pagent.
“This was particularly evident in the second half of the financial year and was the major factor in the one area where we fell short of our prospectus forecast: new car revenue.”
During the year the Sydney and Brisbane focused Autosports acquired three BMW outlets in Melbourne.
While demand from bizoids for Beemers and Mosman matrons for Mercs seems robust enough, the best returns for investors have been with two-wheeled motorised transportation.
Motorcycle Holdings shares have almost doubled since listing in April last year, with motorbike sales across its 27 dealerships growing by 17 per cent in 2016-17.
The 28 year old entity also managed a record net profit of $9.3m, up 16 per cent.
So to all you baby-boomer bikies on their expensive machines: thanks and don’t forget to wear your leathers.
Of the 675 motorbike dealerships nationally, only three companies own more than five and expect Motorcycle Holdings to rev up the consolidation efforts.
