Small Caps | Mar 02 2018
Automotive accessories and accident repair chain, AMA Group, is starting to see the benefit from acquisitions and greenfield developments.
-Well-positioned to lead consolidation in the accident repair industry
-Growth is likely to be driven by revenue, as flat margins expected
-Management's target for former Automotive Solutions earnings could be optimistic
By Eva Brocklehurst
AMA Group ((AMA)) is building up its chain of panel shops and aftermarket automotive services and accessories. This takes time, although the company is starting to see the benefit of activity during the last 6-12 months.
The company owns and operates a number of different businesses and brands and is the largest accident repair chain in Australia. AMA also manufactures automotive components including re-manufactured transmissions and torque converters.
Acquisitions are well ahead of UBS estimates, with $10m spent in the first half and seven large shops acquired since the end of the period. The broker observes the opportunities are large and the business is in its infancy.
The company is tracking ahead of the broker's expectations on both acquisitions and greenfield sites. UBS considers the valuation appealing, maintaining a Buy rating and $1.30 target.
The company has not changed prior guidance for FY18 earnings at over $48m, excluding start-up losses. First half operating earnings (EBITDA) were up 18% on a revenue increase of 27%, while margins declined to 10.5% from 11.3% in the prior corresponding half. Margins were affected by the start-up losses in relation to new rapid repair locations.
Four new rapid repair sites commenced taking vehicles in the first half and another two have commenced in the second half. Total site numbers within the panel operations have increased to 106, which includes 17 acquired sites that are expected to deliver annualised revenue of around $60m.
There was no update on the Blackstone Private Equity bid proposal, which currently values the panel operations at $530m on a cash-free, debt-free basis.
While AMA is the largest accident repair group in Australia it still has a relatively small market share, less than 5%. Hence, in a very fragmented industry, Bell Potter believes it is well positioned to lead consolidation, with a track record of successfully integrating acquisitions.
The broker forecasts growth of 23%, 17% and 20% for earnings in FY18, FY19 and FY20 respectively. This will mostly be driven by revenue, as Bell Potter expects relatively flat margins.
The company now owns formerly-listed Automotive Solutions, with the transaction completed during the half year period. The business will be subject to a material process to turn it around after delivering a net loss of -$4.4m. Canaccord Genuity understands the cost base has already been significantly reduced and corporate overheads quickly removed.
AMA is progressing with consolidation of the various operations across its non-panel facilities and the broker expects this division will break even in the second half. Canaccord Genuity has a Buy rating and $1.30 target.
UBS also envisages an opportunity to take out costs and reap synergies in the Automotive Solutions business but considers management's annualised target of around $6m in operating earnings for the second half optimistic.
Bell Potter downgrades FY18 forecasts for earnings per share by -11%, driven by equity accounting losses from Automotive Solutions as well as higher one-off costs. There is negligible change in the broker's FY19 and FY20 forecasts, which already assume consolidation of Automotive Solutions. Bell Potter has a Buy rating and $1.35 target.
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