Australia | Nov 26 2018
Consistent with industry data, Automotive Holdings has signalled a slowdown in new car sales in the first four months of FY19.
-Subdued retail and consumer sector outlook dragging on new car sales
-Prospects for M&A are strong as automotive consolidation accelerates
-UBS suspects sale process could still ensue for refrigerated logistics
By Eva Brocklehurst
The performance of Automotive Holdings ((AHG)) has slowed in the first four months of FY19, amid soft new car volumes and deteriorating consumer confidence. The company has guided to full year operating net profit in a range of $56-59m.
A stronger second half is expected, but with operating net profit already falling -45%, Morgan Stanley suggests this implies further downside risk to the full year. Automotive trading is likely to remain weak, albeit the company is cycling the most difficult comparables within the first four months.
Consolidated operating earnings (EBITDA) are down -15%, relative to the prior corresponding first four months. The fall in automotive earnings is only partly offset by a modest increase in refrigerated logistics. The company's guidance is consistent with recent VFACTS data, UBS points out, which shows new car sales over July-October were down -5.0%.
The broker has also observed a much more subdued retail and consumer sector outlook in its surveys and does not believe new car sales in FY20 will grow the same rate as in previous decades. UBS notes new car sales grew 3% over 1996-2015..jpg)
New car sales are driven by increased affordability and rising wealth, a function of lower interest rates and better quality at lower price points, as well as affordable financing. However, in the near term these trends are outweighed by macro weakness and dropping house prices.
UBS also does not believe the company can push back on margins. Automotive operating earnings margins have fallen to 2.4% in forecasts for FY19, from 3.8%. From this base, the broker expects incremental improvements, as the company benefits from scale and cost reductions, with margins likely settling around 3.0%.
Finance & Insurance
Automotive Holdings is also affected by the regulatory changes that have occurred in finance & insurance. UBS estimates finance commissions could be reduced by around -25%.
This reduced income should be factored into the stock by now but Credit Suisse has also noted that specific brand pressures exacerbate Automotive Holdings' broader challenges. The company has a geographic skew to Western Australia and an historical over-reliance on finance & insurance income.
Deutsche Bank agrees the outlook is tough. Automotive Holdings, nonetheless, is the largest automotive group in Australia in a sector where scale is increasingly important. The broker believes consolidation will accelerate and benefit the larger operators and, while the near-term earnings risks are high, there is valuation support while prospects for M&A are strong.
Bell Potter acknowledges the difficult operating environment but expects the first half is likely to be the trough in earnings. The broker, not one of the eight monitored daily on the FNArena database, maintains a Buy rating with a $2.20 target.
Refrigerated Logistics
Bell Potter downgrades estimates for earnings per share by -15% for FY19 and FY20, driven by reductions in automotive forecasts, partly offset by increases in refrigerated logistics forecasts.
However, the broker still does not expect as strong an improvement in the second half performance of refrigerated logistics as the company appears to be anticipating. Operating earnings for the refrigerated logistics segment of $11.4m were up 6%, and the company expects a substantial improvement in the second half.
There are new fleet, warehouse & transport management systems, but UBS suspects the company will not reach its 10% operating earnings margin target for FY20. Now the business has been reinvigorated, the broker suggests the company could run a sales process and divest the division over the next year.
The database shows two Sell ratings, four Hold and one Buy (Ord Minnett, yet to comment on the update). The consensus target is $2.07, suggesting 21.8% upside to the last share price. The dividend yield on FY19 and FY20 forecasts is 7.3% and 8.8% respectively.
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