Acquisitions Fuel Momentum For Autosports

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Autosports delivered a strong FY17 maiden result, signalling scope for further acquisitions in FY18.

-Service capacity expanding and greenfield dealership sales ramping up
-Victorian acquisitions fuelling momentum
-Minimal exposure to ASIC's consumer credit changes
 

By Eva Brocklehurst

Autosports ((ASG)) delivered a strong FY17 maiden result, signalling scope for further acquisitions in FY18. The company has purchased BMW Melbourne for $22m, expected to settle in November. Wilsons takes a more positive view on the outlook, in noting the purchase of BMW Melbourne, and upgrades earnings per share estimates by 4-9%.

The stock offers an attractive growth profile in excess of its peer group, with balance sheet capacity to acquire more dealerships, in the broker's opinion. FY17 net profit of $29.5m, up 41%, was ahead of forecasts. No formal guidance was provided.

The recent acquisition of BMW Melbourne for $22m is expected to settle in November, expanding the company's footprint in Victoria. The broker, not one of the eight monitored daily on the FNArena database, upgrades the stock to Buy from Hold, increasing the target to $2.53 from $2.18.

Wilsons highlights the contribution from the expanded service capacity and the sustained ramping up in greenfield dealership sales. The main risk is retail conditions, particularly NSW and Queensland, and regulatory reform related to the provision of finance & insurance products.

UBS rates the stock a Buy with a $3.00 target. The broker found the results messy, given new businesses. Underpinning the result was used car volumes, lifting 9.8%, and a 34% rise in finance & insurance growth, as well as the increased servicing income from maturing dealerships.

Macquarie considers this result a good start for the company as a listed entity. Despite a noticeable softening in industry conditions during March and April the broker commends the business performance, and highlights the quality of the dealer network in the benefits of diversification in revenue. Macquarie has an Outperform rating and $3.20 target.

New car volumes missed Macquarie's expectations but this was offset by used car volumes. The company has added further after-sales capacity, principally via Audi Indooroopilly, Volvo Sydney and Alpha Romeo Leichhardt.

The company has pointed out that 70% of its book is commercial and exposure to ASIC's consumer credit changes is minimal, while no dealerships were exceeding the 2% margin threshold.

Macquarie notes that over 60% of finance provided by the company is through original equipment manufacturers (OEM) and, increasingly, volumes are shifting towards guaranteed residual value terms, which reflect the pricing pressure on used vehicles. OEM financing provides a competitive advantage, given domestic banks typically refrain from taking on residual value risk.

Acquisitions

The acquisition of BMW Doncaster in April has provided momentum, as it contributed three months to FY17 and was not included in prospectus estimates. Management has noted the performance exceeded initial expectations.

The acquisition of BMW Melbourne is expected to be accretive from FY19 and management has stated its intention to lift margins towards the company average. Macquarie observes an abundance of further acquisition opportunities, which are expected to be weighted towards the second half of FY18.

BMW Melbourne extends the company's reach in Victoria in line with a strategy to lift the penetration of prestige and luxury dealerships on the eastern seaboard. This adds to the Victorian purchase in August last year of Volvo Brighton and BMW Doncaster in April.

UBS believes there is a path to 3-4% operating earnings (EBITDA) margins by FY20 should the company tighten stock management and reduce costs at BMW Melbourne and share non-customer facing functions with BMW Doncaster.
 

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