Australia | Dec 15 2020
Eagers Automotive is cruising comfortably, shedding non-performing businesses while maintaining strong margins over 2020. Can this continue?
-Strong earnings trajectory over 2020
-Tight inventory boosts margins
-Scope for increased sales and cost optimisation
By Eva Brocklehurst
Strengthening new vehicle sales and a tight inventory position have led to a sound finish to 2020 for Eagers Automotive ((APE)). Customer orders have also started to tick up as supply constraints ease.
Eagers has signalled 2020 pre-tax profit guidance of $195-205m, which implies $98-108m was generated in the fourth quarter. This represents a full year of trading following the acquisition of Automotive Holdings and the divestment of refrigerated logistics and Kloster Motor. Guidance also excludes items such as JobKeeper and restructuring costs.
Morgans expects the company will emerge with negligible net corporate debt over the next year as property acquisitions replace expensive leases and a structurally higher earnings capacity is unveiled post a $100m cost reduction program.
Margins may be boosted by a shortage of inventory stemming from lockdown-constrained OEMs (original equipment manufacturers) but 2020 also incorporates material pandemic-related losses as well as benefits from structural cost reductions.
Additionally, new car volumes nationally in 2020 were -20% below "normal". The stock may have re-rated strongly to date but Morgans envisages further upside amid continued earnings momentum.
UBS calculates the 2020 result will absorb around -$50m of losses stemming from lockdowns and expects similar volume and pricing dynamics in the first quarter of 2021. Regardless of the 60% increase in the share price over the last quarter the broker, too, believes the risk/reward remains favourable.
By 2025 UBS assesses an opportunity to reduce the dealership network by more than -30% and costs by -21%. Factoring in a 4% long-term operating earnings (EBITDA) margin UBS cites cost reductions as key to incorporating further upside.
Moelis envisages numerous avenues for growth, including structural aspects such as higher car ownership as a result of the pandemic and further rationalisation of the company's property. The potential for the government to ease responsible lending obligations could also assist the new vehicle sales market, Ord Minnett points out.
Morgan Stanley observes the market still views Eagers Automotive as a cyclical stock, trading on new vehicle sales momentum, and argues the structural growth angle is under-appreciated.
Fixed-price used cars present an opportunity, as well as network optimisation as property costs are reduced. There is also the company's goal of finance penetration over the long-term of 80% compared with the 40% currently experienced.
Moreover, reduced supply because of limited OEM capability implies sustainably higher margins and Morgan Stanley believes the tailwinds from the delivery of structural growth more than offset the headwinds from normalised used car pricing.
A strong boost to margins usually occurs when inventory conditions are tight and this has resulted from the constraints at OEMs that shut down during the pandemic. Therefore, incorporating all aspects of the update, Morgans does not believe the business has over-earned and expects an incremental $66.4m of net profit in 2021, forecasting $268.5m, or growth of 33%.