Eagers Automotive ((APE)) enjoyed premium conditions in the first quarter but this has not settled several unknowns regarding the outlook beyond the pandemic. The company has experienced a rare combination in the automotive sales industry – tight supply amid strong demand.
Pre-tax profit was $98m in the quarter which did not include property sales. While brokers are upgrading estimates conservatively, questions about whether such conditions can continue, and for how long, remain.
Credit Suisse notes, once the Daimler sale is completed, Eagers will exit with a debt-free balance sheet and plenty of options for both dealer and property acquisitions.
Both the sale of the Daimler business and the compnay’s Milperra property are on track for completion in the first half, expected to deliver a net pre-tax gain of $32-36m and reduce profit by -$10m. UBS incorporates the sale and the stronger first quarter but estimates for 2022 and beyond are unchanged.
UBS does not extrapolate the first quarter, while noting the second and fourth quarters have historically been the strongest. The broker acknowledges medium-term value drivers are intact, such as strength in front-end volumes and continuing optimisation of the cost base and portfolio.
Moelis expects the company should “at least” replicate the first quarter result in the second and deliver sequential growth in the first half. The forward order book has continued to build and the broker suspects the issue of new car availability will be the major driver of sales over the next few quarters.
Morgans points out while supply constraints continue, these are clearly not interfering enough with deliveries and forward orders remain strong. Over the longer term, the broker believes the company, using a strong balance sheet, can target strategic acquisitions.
Margins
To date, supply ex-restrictions has been almost perfect in terms of profitability with margins at historically high levels and this has more than offset sales that were unable to be delivered.
The first quarter is usually the cyclical low point in terms of industry volumes and, coupled with the payment by Toyota of incentives in December each year and original equipment manufacturer (OEM) payments at the end of each quarter, Morgans assesses it plausible that pre-tax profit can reach $400m in 2021, although retains a forecast of $340m.
Supply constraints will ultimately ease and should mean automotive margins return to normal, although there is a potential structural shift in OEM supply that reflects a ‘Just in Time’ model, meaning margins may stay above pre-pandemic levels.
All up, Morgans believes there is an upside risk to forecasts should the current trends continue for longer than anticipated. Current dynamics are likely to continue for most of 2021, Ord Minnett agrees, and the medium-term is positive for the company as it benefits from the adjusting industry structure.
Profitability in automotive dealerships have been largely driven by gross margin expansion rather than consumer purchase decisions being brought forward, the broker adds.
New vehicle sales, on a rolling 12-month basis, are currently well down on averages experienced over the past decade. Hence, Ord Minnett does not believe an uplift in volumes and the resultant OEM rebates will counter margin expansion even if supply substantially increases.
Morgan Stanley lifts estimates for pre-tax profit in 2021 to $331m and notes, from dealer checks, that dealerships are carrying 1-2 months in order backlogs. The broker assumes pre-tax profit margins normalise in the second half as supply constraints ease and volume growth flattens.
2022
So, what will 2022 look like? Morgan Stanley highlights demand has just started to turn around from multi-decade lows and circumstances will simply become “good” if they just revert to the long-term average.
Credit Suisse envisages the combination of rising house prices, strong equity markets and participation in non-traditional assets are collectively making demand greater than it was prior to the pandemic. The broker opts for a gradual flattening of these conditions over 2022 and considers the current stock multiple appropriate.
Bell Potter agrees the current P/E ratio, in the mid-to high teens, is right for what is likely to be peak earnings and, not one of the seven stockbrokers monitored daily on the FNArena database, maintains a Hold rating with a $16.50 target. The broker assumes the current supportive environment continues before some reversion towards the norm in the December quarter.
Moelis continues to assume supply remains tight through 2021 and its valuation is based on 2022, when margins on sales should return to mid cycle levels. The broker expects that supply will increasingly shift to electric vehicles and this will raise issues for the industry as the rolling out of infrastructure will become important.
Moelis, also not one of the seven, has a Buy rating and $17.81 target. The database has five Buy ratings and one Hold (Credit Suisse). The consensus target is $16.34, suggesting 1.5% upside to the last share price.
