Accelerating Repair Costs Benefit AMA Group

Small Caps | Jul 10 2019

AMA Group stands to benefit substantially from the trends in vehicle repairs. Moelis initiates coverage of the stock.

-Scale benefits will allow significant investment in tooling and training
-Main challenge is to avoid margin erosion
-Substantial acquisition pipeline

 

By Eva Brocklehurst

Motor vehicle complexity is accelerating the cost of repairs and shifting the focus of the panel beating industry to parts replacement rather than labour-intensive repair. Panel repair and automotive accessories business, AMA Group ((AMA)), stands to benefit substantially.

Moreover, insurance industry data shows an increase in claims in the past two quarters. Accident frequency rates may be declining but the complexity of repairs, because of the technology involved as well as the materials used, is driving up the cost of claims.

Insurers faced with rising costs of claims are increasingly combining with a preferred repairer to improve claim experience and customer retention. Moelis believes, in order to improve productivity and maintain cost competitiveness, repairers will need to scale up and invest in technology and training.

 AMA Group has the scale that allows significant investment in tooling, training and data systems to keep up with the growing complexity of electronic content and materials composition.

This trend will underpin the better capitalised operators, that are likely to consolidate the smaller businesses unable to respond to changes. In this regard, increased acquisition activity by AMA Group has led Wilsons to upgrade forecasts for outer years. Trading conditions appear consistent with expectations at this stage.

Accelerating Insurance Costs

Wilsons points out accelerating growth in average insurance claim values, reflecting the increasing vehicle complexity, is driving structural cost inflation in spare parts. AMA Group has a strong relationship with key insurers which brokers expect will ensure stability of turnover and underpin its investment in new capacity.

Moelis forecasts strong growth in earnings per share, averaging 23% over the next three years, underpinned by acquisitions as well as greenfield expansion, and initiates coverage with a Buy rating and target of $1.61.

The challenge will be for the company to negotiate contract pricing adjustments with insurer customers to avoid margin erosion, Wilsons assesses, maintaining a target of $1.08 and a Hold rating.


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