Eagers Automotive’s interim result turned out better than it had downwardly guided in May but in line with the July update. Demand is resilient despite the extended wait times for delivery.
Underlying profit before tax for 1H22 of $195.1 million handily beat the guidance range of $183-189 million even with volumes down 10% year on year.
Demand continues to outstrip supply of new vehicles and a 32% increase in the order bank in 1H22 keeps growing. The long wait has not dissuaded customers from placing orders and the July and August have provided a strong base for 2H22 and into FY23. A key factor in the robust order profile is the launch of the new Ford Ranger and its genetic cousin, the VW Amarok.
The supply choke point is easing modestly and yet APE is warning the current supply dynamics could stretch out to FY25f. As long as the order bank does not suffer any great degree of attrition, due to the long wait times, this is effectively good news for earnings.
New vehicle pricing has helped to bump up gross margins by 50bp although there has been some negative revenue mix shift happening.
APE has sought new avenues for growth and other than the usual addition of new manufacturers brands and new markets, the company has innovated to establish new formats such as the Automall West in Indooroopilly, Queensland. This is like a shopping mall for cars with 8 manufacturers represented in a 2,400 sqm showroom and a rooftop servicing department.
New brands such as China’s BYD (electric vehicles) has hit the ground running. The run rate is thought to be around 3k vehicles per quarter.
Another acquisition, this time Newspot in Adelaide has 7 brands, $100 million turnover and comes hot on the heels of the WFM Motors acquisition in Canberra.
APE’s balance sheet is very lean at just 0.2x net debt to EBITDA (post WFM) giving it firepower at a time when competitors might be feeling the pinch. We expect to see more deals in the next 12 months.
Investment view
In hindsight, APE’s downgraded May guidance was a bit misleading and perhaps spurred by a sense of over-caution. The outlook paints a picture of very strong underlying demand, not diminished by rising interest rates or economic uncertainty.
One thing that might disturb the industry would be government policy to lower emissions targets on new vehicles to catch up with European standards. This will be just one small aspect of the broader transition to EVs at the expense of ICEs. To its credit, APE is beginning to put a foot in both camps by developing relationships with EV OEMs such as BYD and others.
With the buyback about to commence, a larger dividend, more acquisitions likely on the way, and an order book full to the brim, earnings momentum looks positive. We have maintained our Hold recommendation but recognise the possibility of consensus upgrades.
Risks to investment view
The Australian new and used car market could experience a slowdown of demand if consumer confidence fell. New vehicle demand can be volatile. The dealership market is undergoing a gradual restructuring being imposed by some manufacturers and this presents a challenge to APE and other dealership networks.
Recommendation
We have retained our Hold recommendation.
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