Start Your Engines

Australia | Aug 01 2022

This story features EAGERS AUTOMOTIVE LIMITED, and other companies. For more info SHARE ANALYSIS: APE

A look into the prospects for Australian-listed auto stocks this reporting season.

-New car buyers frustrated by delivery delays
-Car dealership and parts provider reviews
-Stocks have come off their highs

By Tim Boreham

Venture down to a car dealership today, the only bargaining you are likely to see is the Monty Python reverse-haggling variety by which desperate buyers beg to pay more for delivery some time before Christmas…2023.

We exaggerate, but not much. The reality is that the dealers and car makers hold the whip hand and that the sticker price is a case of ‘truth in advertising’ for the first time since Karl Benz invented the horseless carriage on a slow weekend.

(And speaking of Benzes, Mercedes’ contentious set price policy means its dealers can’t undercut each other, but they can still compete on trade-in values.)

The restoration of decent margins to the metal – the cars — itself means the dealers don’t have to resort to fleecing customers with marked-up accessories and dubious insurance and financing (some of which are now illegal anyway).

In short, life in the showroom should be as dazzling as the display vehicles itself – but things are more nuanced than that. For a start, they can’t make money on a sale if they can’t get the car off the boat in the first place.

Investors are well served with four listed vehicle dealerships, which front the market with full or half year disclosures this month.  

The country’s biggest dealer group after subsuming Automotive Holdings in 2019, the Nick Politis-controlled Eagers Automotive ((APE)) has guided to a pre-tax profit of $246m for the June half.

That’s better than the $225-240m indicated in May and, at the midpoint 7% higher than the previous corresponding covid-afflicted response.

Management reports a record new car order book and a cost cutting drive, with the ongoing supply constraints offsetting some of the joy.

Elsewhere, Peter Warren Automotive ((PWR)) and Autosports Group ((ASG)) are yet to update the market, but we dare say the numbers also will be strong. Broker Morgans tips a $77.8m pre-tax profit for Peter Warren, 3% better than previously on revenue of $1.64bn, 1.2% higher.

In late 2021, the Sydney and Brisbane-oriented group expanded into the eastern Melbourne market with the $104m cash-scrip purchase of the storied Penfold Motors Group.

With a focus on upmarket marques including BMW, Rolls Royce and a Maserati purveyor thrown in as well, Autosports is tipped to record a circa $55m net profit, 15% higher.

The country’s biggest agglomeration of motor bike dealerships, Motorcycle Holdings ((MTO)) is expected to post a $21.7m full year net result, a big rev-up on the previous $12.6m.

But is the showroom gloss wearing off the sector?

Stats from the industry body Vfacts show that new vehicle sales came in at 100,000 in the month of June, about -10% down on the May and previous June result. June half deliveries of 528,000 units are 21% higher than the (very) covid-afflicted June 2020 period. Just to confound things, sales are also some 21% below the five-year pre-covid average.

For the rest of the year, supply looks like remaining constrained because of ongoing microchip shortages, covid disruptions in China and the Ukrainian conflict. This suggests that pent-up demand will remain strong, but the unanswered question is the extent to which consumer confidence holds up amid the Reserve Bank’s blitzkrieg on inflation.

The valuation of the dealers suggests tougher times ahead because the shares are going like a 15 year old Camry with a whining diff.

Year to date, Eagers Automotive shares are -10% off the pace and fallen -20% over the last 12 months. The stock is also below its prevailing value when the company was mopping up the last recalcitrant Automotive Holdings shareholders in late 2019.

Peter Warren and Autosports shares have lost almost- 30% and -22% of their value over the last year, respectively.

At prevailing valuations, the dealer shares present keen value. We won’t say the bargain of a lifetime – drive away – no ore to pay – but solid dividend paying propositions if the consumer Armageddon fails to eventuate.

On Morgans numbers, Peter Warren, Autosports and Motorcycle Holdings are trading on current year multiples of less than seven times, on yields of 8-9%. Eagers is trading on less than eleven times for the calendar 2022 year, on a circa 6% yield.

Of course, the dealerships are merely one iteration of the listed automotive sector which also spans parts and accessories and fleet management.

Bapcor ((BAP)) is a well-established parts supplier, as is ARB Corporation ((ARB)), which caters for the four wheel drive audience.

Both stocks don’t look cheap but maybe that’s for a reason: ARB’s revenue and earnings have recorded a compound annual growth rate (CAGR) 9.4% and 11.6% respectively over the last decade, while in May management spoke of a “consistently high” order book.

Not to be outdone, Bapcor’s revenue and profits have grown at a CAGR of 26% and 31% respectively since the company listed in April 2014.

Bapcor’s management reports that as of the end of March this year, performance has been “good”.

The lesser known National Tyre & Wheel ((NTD)) imports and distributes tyres and wheels – more than 2.5m of them – in Australia, New Zealand and South Africa.

Last week the company said operating earnings would come in at $40-42m, off the pace from an “unusually buoyant” 2020-2021.

The disclosure let some air out of the company’s share price, which tumbled up to -19% to below the November 2017 listing price of $1 a share.

Management maintains the company is wheely well placed and will never tyre of giving good customer service.
 

This article does not constitute share recommendations and readers should seek their own financial advice from a properly qualified party

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CHARTS

APE ARB ASG BAP MTO NTD PWR

For more info SHARE ANALYSIS: APE - EAGERS AUTOMOTIVE LIMITED

For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED

For more info SHARE ANALYSIS: ASG - AUTOSPORTS GROUP LIMITED

For more info SHARE ANALYSIS: BAP - BAPCOR LIMITED

For more info SHARE ANALYSIS: MTO - MOTORCYCLE HOLDINGS LIMITED

For more info SHARE ANALYSIS: NTD - NATIONAL TYRE & WHEEL LIMITED

For more info SHARE ANALYSIS: PWR - PETER WARREN AUTOMOTIVE HOLDINGS LIMITED