Demand for new vehicles in Australia remains healthy, but a variety of factors have conspired to slow down the delivery of orders. Eagers Automotive has explained this will reduce its half-year earnings.
APE is expecting to deliver about 13% fewer vehicles in 1H22 compared to last year. This is due to chip shortages, the Russia- Ukraine situation, lockdowns in China and shipping bottlenecks all contributing to a weaker supply of vehicles.
In contrast, buyers in Australia continue to place orders which are now running 34% ahead of deliveries. We estimate that APE’s order bank is now more than 50,000 vehicles representing close to 6 months’ worth of volume to be delivered at historically high prices. The obvious conclusion is that 1H22 earnings weakness is simply being deferred into later periods until the supply situation is rectified.
APE is overlaying some good cost control and the recent acquisition of WFM Motors in the ACT which will provide a tailwind for 2H22f.
APE management continues to expect a new vehicle market of around 1 million in CY22, roughly the same as 2021.
We now think that the uncertainty of the supply side issues will lower APE’s revenue in FY22f. The combination of supply volatility, the impact of rising interest rates on demand and longer term risks including a transition to EVs and the changing structure of OEM distribution models in Australia will all create challenges for APE and the industry. Considering these challenges, we do not see a near term catalyst that can reignite the share price.
APE has lowered its 1H22 profit guidance by 12-15%. The company now expects 1H22 profit before tax to be in the range of $183-189 million. For context, 1H21 profit before tax was $183 million.
Investment view
Frustratingly for APE and its customers, that new car feeling is a bit further away than either one wants. The supply-side slow dance is thankfully offset by the demand side quick-step, but an array of headwinds is set to test that theory. We like the best-in-class story of APE with its unique scale advantages and differentiated strategy. But we now think the short term headwinds have dug into APE’s best intentions sufficiently to warrant a change of recommendation to Hold.
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 lowered our recommendation to Hold from Buy.
