article 3 months old

Weak Consumer Puts Vehicle Sales In Reverse

Australia | Oct 08 2018

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

Australia's new vehicle market has reversed over recent months, a function of weak consumer sentiment amid looming regulatory changes for the dealer industry.

-Profitability negatively affected by structural changes after ACCC review
-Deterioration in luxury vehicle sales over past two months
-4WD sales stabilise, most positive sector

By Eva Brocklehurst

Australia's automotive industry has hit a soft patch, with the new vehicle market declining, particularly in the private vehicle segment. The latest VFACTS report reveals monthly volumes for the new vehicle market have been negative for each of the last six months.

Brokers are particularly concerned about the deceleration in private sector demand, which Macquarie suspects is a function of tightening credit conditions, along with softer house prices producing a negative wealth effect.

Wilsons suggests weak consumer sentiment is overshadowing new vehicle sales. Sales for private buyers were down -16% in September and accounted for 42% of total new vehicle sales. This is below the average of the last 24 months of 48%.

Moreover, the sector is undergoing significant structural change after the ACCC review and profitability has been negatively impacted. Macquarie believes growth in the penetration of dealer finance will take time to stabilise while confidence rebuilds.

New vehicle sales growth slipped -5.5% in September with sales to private buyers declining substantially. Rolling six-month sales were down -3.3%. Despite six months of declining sales, Moelis understands that manufacturers' incentive targets have still not been adjusted to market conditions. Therefore, dealers are carrying excess inventory and looking to discount stock, further putting pressure on margins.

Without obvious catalysts for a recovery in consumer activity, Wilsons remains cautious about the short-term outlook for Automotive Holdings' ((AHG)) core business, with a Hold rating and target of $2.42.

Macquarie agrees there is downside risk to consensus estimates for Automotive Holdings in FY19 and challenging conditions should weigh on volumes and margins. The broker has downgraded to Underperform from Neutral, with a target of $2 as a result.

As trading conditions have deteriorated, amid upcoming headwinds regarding flex commissions, Moelis also downgrades earnings estimates for Automotive Holdings while maintaining a Hold rating and $2.34 target.

The broker understands acquisition pricing is becoming more reasonable but expects Automotive Holdings to focus on its existing business for now. The company could benefit from the closure of underperforming dealerships and easyauto123 moving to break-even by the end of FY19, but the broker suspects the benefits will be offset by regulatory changes mandated from November 2018.

Widespread Weakness

The slump in the quarter occurred across most states, with the exception of Tasmania and ACT. NSW sales dropped -7.7%, South Australia -4.9%, Victoria -3.5% and Queensland -3.6%. There was some recovery in business buyer activity in Western Australia but this was more than offset by the soft private buyer, with sales down -4.2%.

Queensland outperformed the broader market but was in decline, again driven by private buyers. As this is a major state for AP Eagers ((APE)), Wilsons highlights deteriorating trading conditions, retaining a Sell rating and target of $6.53.

The broker also notes prestige & luxury vehicles have suffered a sudden deterioration over the last two months. Autosports Group ((ASG)) is exposed to this segment and its rolling three months of data suggests sales were down -11% for major brands. The broker has a Buy rating and target of $1.78.

4WD sales stabilised and outperformed the broader market, with a rolling three-month growth rate of 3.7% in September. This is a significant segment for ARB Corp ((ARB)) and the broker has a Hold rating and target of $20.75.

For other stocks associated with the sector, Wilsons has Hold ratings on AMA Group ((AMA)) and GUD Holdings ((GUD)) and targets of $1.07 and $13.50 respectively. A Buy ratings is accorded to Motorcycle Holdings ((MTO)) with a target of $3.88.

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AMA APE ARB ASG GUD MTO

For more info SHARE ANALYSIS: AMA - AMA GROUP LIMITED

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For more info SHARE ANALYSIS: ARB - ARB CORPORATION LIMITED

For more info SHARE ANALYSIS: ASG - AUTOSPORTS GROUP LIMITED

For more info SHARE ANALYSIS: GUD - G.U.D. HOLDINGS LIMITED

For more info SHARE ANALYSIS: MTO - MOTORCYCLE HOLDINGS LIMITED