Tightness in the supply of new vehicles has caused a reality check for Eagers Automotive’s share price, but deliveries are simply being shunted into next year. Higher gross margins will still feature in APE’s results as the company continues its efficiency improvements. The fight between dealers and manufacturers on change to an agency model is gaining heat.
Lockdowns and supply volatility in 2H21f have thrown a spanner in the works for APE this year, but demand has not waned. Gross margins are still likely to improve along with volume and deliveries into 1H22f as the market plays catch-up. Supply volatility remains the key challenge due to on-going chip shortages and shipping delays.
As these problems begin to dissipate, dealers should experience fewer issues satisfying customer demand in 2022. Service and parts revenues should also rebound after the disruption of 2021.
An industry issue we are watching closely is the manufacturers’ push towards an agency model, creating fixed prices and changing the dealer’s role to a middleman. This would greatly affect the profitability of car dealerships, forcing them to drastically reduce operating costs to remain at least as profitable as under the current industry model. Honda Australia has already changed to an agency model while Mercedes-Benz is being taken to court by a majority of its Australian dealerships (APE has 6 Mercedes-Benz dealerships) for the loss of goodwill the change will extract and the lack of compensation in that regard.
Meanwhile, APE is adapting its business under its Next100 Strategy which includes easyauto123. This is a fixed price used car business the aims to emulate the success of similar US outlets. APE has a first-mover advantage in Australia and can leverage its scale in the trade-in network. APE is expecting EA123 to contribute approximately $14 million in pretax profit in CY21f and this business has strong prospects for further growth.
Investment view
APE’s share price has fallen 20% since September but we see this as a short term reaction to supply disruption to new vehicle deliveries and lockdown pressure. We expect a gradual recovery in 2022, particularly as supply pressures ease and dealers are able to meet elevated demand for new vehicles. The earnings kicker comes from servicing and parts which has also been affected by lockdowns. Earnings would be affected if the new vehicle supply issues extended throughout 2022 but there is hope that these issues are abating.
The hype surrounding electric vehicles is not yet translating into a significant issue for car dealers. Sales of EVs (including hybrids) remains immaterial to the market but dealers know this will not be the case for too much longer.
With earnings forecasts having adapted to the shift of deliveries into CY22, the current share price fall provides an ideal opportunity to acquire a position in APE. We have raised our recommendation to Buy.
