Australia | Jul 30 2021
Tailwinds show no signs of abating for Eagers Automotive as its order book continues to exceed supply, enabling full margins to be maintained
-Benefits of stimulus payments, credit conditions and tax incentives prevail
-Demand/supply should become more balanced in 2022
-Equally strong second half envisaged
By Eva Brocklehurst
Trading conditions continue to benefit Eagers Automotive ((APE)) along with the seasonal uplift from financial year-end sales. Earnings strength is equally about demand as it is about pandemic-induced supply constraints of new vehicles.
First half underlying operating profit pre-tax is $218.6m, which the company attributes to savings extracted during 2020 and ongoing synergies from the merger with Automotive Holdings. Furthermore, demand continues to outstrip supply and volumes have recovered from lows experienced during the height of the pandemic.
First half guidance implies a full year underlying net profit run rate of around $437.2m, Morgans calculates, noting OEM (original equipment manufacturer) bonuses tend to be larger in December compared with other months.
UBS was impressed with the 30% increase in profit half-on-half, given the prior half already benefited from tailwinds such as stimulus payments, improved credit conditions and expanded tax incentives. The main issues going forward are how long demand remains elevated and when supply pressures will ease.
The broker notes new vehicle sales in the first half were 2% above the 2019 corresponding half and current lockdowns are likely to further impact these sales in July and August.
Morgans calculates finance and insurance has increased pre-tax profit by $2.5m for every 1% move up in penetration rates. Assuming penetration can move to 60% from around 40%, which is still below the US/UK average of 80%, this would create a $50m pre-tax profit opportunity.
The broker points out demand should reach equilibrium in 2022 leading to a normalisation of margins. Beyond this point, downside can be limited through additional cost reductions and efficiency opportunities.
Macquarie continues to envisage further upside risk to consensus expectations for 2022, noting on its forecasts Eagers is trading on 18x 2022 price/earnings, which implies a -22% discount to the small industrials compared to a +4% five-year average
To put demand in context, Morgan Stanley flags 2021 new vehicle sales are annualising at around 1.1m, well within historical ranges and above 2019. The broker notes the peak of 1.19m in new vehicle sales in 2017.
Moelis suspects the Sydney lockdown will be relatively muted in terms of its impact, as Sydney represents only around 15% of the company's overall sales. While there is likely to be some impact on service income, the company can reduce staffing costs to partially offset this.
The broker also notes, during the Melbourne lockdown, the drag on business was -$5m in pre-tax profit per month. Hence, a less strict lockdown in Sydney should ensure a lesser drag.
On the supply side, uncertainty exists around semiconductor shortages although some vehicle manufacturers are starting to find signs of improvement. Still, the spread of the delta variant creates potential for substantial disruptions in global supply chains and further delays to shipping.