Australia | Sep 02 2019
AP Eagers has outperformed the broader market in the first half and will now consolidate the merger with Automotive Holdings, creating a substantial presence in car dealerships.
-AP Eagers makes no call on the outlook for vehicle sales, although notes improved trading conditions
-Projected earnings from the merger important for the outlook for the next 12-18 months
-Additional synergies with Automotive Holdings expected to provide the upside
By Eva Brocklehurst
The outlook and profile of automotive dealership AP Eagers ((APE)) has changed substantially as it prepares to absorb rival Automotive Holdings ((AHG)). Moreover, the company has demonstrated an ability to grow car sales through a cyclical downturn.
Brokers are encouraged by a suggested improvement in trading conditions towards the end of the first half, as the company continues to outperform the broader market in new car sales and also enjoys growth in used car sales.
First half net profit exceeded expectations, up 1.8%, driven by cost reductions and improved trading conditions late in the half. The increase compares to AGM guidance for a -7-10% decline. Management has ascribed the better result to conservative guidance, a better performance after the federal election than previously anticipated, cost savings and restructuring.
Truck earnings grew modestly in the first half while property and investment income declined. AP Eagers did not make a call on the outlook for vehicle sales but will reduce its inventory position in the second half.
Ord Minnett considers the company ideally positioned to participate in further consolidation, which should accelerate its market leadership and widen the competitive gap between scale networks and smaller operators. The acquisition environment may be favourable but Wilsons does not expect significant opportunities will emerge in the near term and the focus should remain on integrating Automotive Holdings.
Credit availability is constrained and excess inventory continues to hamper the market, although the broker points out the ban on flex commissioning will be cycled soon. Management has noted some challenges in delivering competitive rates to low credit quality customers but also has flagged highly successful outcomes in other areas. The target for 50% penetration in the finance & insurance division has been pushed out to FY20 but AP Eagers remains committed to the long-term target of 80%.
Projected merger synergies are expected to drive strong earnings growth over the next 12-18 months. The company has reiterated $13.5m in synergies within a timeframe of six months and an additional $16.5m to be realised within 12 months, for a combined synergy target of $30m.
The synergy target is in line with Morgans' assessment, although the timeframe is shorter than envisaged. While synergies will come at a material cost and this is difficult to estimate, the broker calculates $10-20m.
Credit Suisse assumes $40m in synergy benefits over three years and now applies a 16.0x earnings multiple to 2020 earnings. Ord Minnett sets its target at a 20% premium to underlying valuation, because of the anticipated merger and the value attributed to synergies.
The company now has a relevant interest in Automotive Holdings of 71.9% and the offer closes on September 16. While the share price is factoring in the merger and base case synergies, additional synergies will provide the upside, in Morgan's view, along with any cyclical upturn in industry conditions.
The company is well-placed in any case, as it has a disciplined focus on cost. The combination of the two businesses is likely to create a strong earnings growth story and Morgans expects the company's influence on an underperforming Automotive Holdings and increased finance penetration will be welcomed.
Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, has a Hold rating and target of $10.93. There are four Buy ratings on the database for AP Eagers. The consensus target is $12.72, signalling 2.8% upside to the last share price.
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