The momentum in the economy remains positive with improving personal income and unemployment levels. Consumer confidence showed marked improvement in January 2021 as per the survey conducted by ANZ-Roy Morgan. A range of economic indicators showed a positive trend in Australia. Faster recovery in household consumption supported the GDP expansion in the September 2020 quarter.

According to the Reserve Bank of Australia, GDP is expected to return to pre-pandemic levels by the middle of this year. The removal of social distancing norms and supportive monetary policy are the factors that have pulled forward GDP growth projections from 2021 into the later part of 2020.

The unemployment rate improved 0.2% to 6.6% in December 2020 as compared to the preceding month. The easing of restrictions in Victoria contributed to the gains. While employment in other states showed moderate growth. Revival in the economic activity favourably impacted labour participation rate and hours worked which had contributed to the overall gains in employment in December 2020 as per data released by The Australian Bureau of Statistics.

Figure 1. Unemployment Rates Have Been Improving; But Still Above 2-Year Average:

Source: Data from The Australian Bureau of Statistics, Chart Created by Kalkine Group

As per the recent data release, household wealth (or net worth) showed a progressive growth of 1.5% in June 2020 quarter and 1.7% in September 2020 quarter (on a YoY basis). Revival in the housing market with upward trending property prices and favourable returns in the domestic and international stock market contributed to upside valuation gains in superannuation funds (or pension funds). This favourably impacted household wealth which had increased by $186.8 billion to $11,351 billion in September 2020.

Improvement in household income and stability in the global market saw household wealth per person reaching $4,41,649 in September 2020 as compared to the preceding month.

Figure 2. Average Household Wealth Per Person Showing Recovery:

Source: Data from Australia Bureau of Statistics, Analysis by Kalkine Group

The COVID-19 impacted vehicle sales with a 13.7% decline in sales of new vehicles in Australia in full-year ending 2020 to 916,968 units. However, new vehicle sales improved on a YoY basis with a growth of 13.5% in December 2020 over the prior year and 12.4% in November 2020 over the prior year.

Automotive brands and their dealership network have found the last twelve months an extremely challenging period. SUV continues to dominate the pack accounting for 49.6% of the total market in 2020, up from 45.5% in 2019. This was followed by LCV with a growth of 22.4% and passenger vehicles with a growth of 24.2% in 2020. An increase in personal income, improving household wealth and favourable unemployment levels are the top factors that led to the growth.

The data from The Federal Chamber of Automotive Industries indicated that Toyota retained the top-selling brands with the market share of 22.3% in 2020, following Mazda (9.3%), Hyundai (7.1%), Ford (6.5%), and Mitsubishi (6.4%). Toyota HiLux, Ford Ranger, and Toyota RAV4 were the top three selling vehicles.

Figure 3. Recovery in Vehicle Sales in Full-Year 2020:

Source: Data from The Federal Chamber of Automotive Industries, Analysis by Kalkine Group 

In an updated release, the sale of new vehicles increased by 11.1% in January 2021 to 79,666 units. Every state in Australia reported positive growth in vehicle sales. The report mentioned that Northern Territory topped with 38.7% growth and Victoria with 1.9% in January 2020 over the prior year. The recovery also reflected the built-up demand towards the COVID-19 restrictions. Sales to private buyers led the growth, offsetting declines in businesses, and government and rental segments. Toyota continues to lead followed by Mazda and Hyundai as the top three brands. The Toyota Hilux was the bestselling model in January 2021.  

Australia is the forerunner in developing connected and automated vehicle technology. It has commenced a wide range of trials since the issuance of guidelines by the government in 2017. The Northern Territory is pursuing second stage trials of its automated electric bus started in 2018. South Australia was the first state in Australia to showcase automated technology in 2015. The Victorian government-led a two-year trial of semi-autonomous vehicles on Melbourne's EastLink.

In a report by the Australian Trade and Investment Commission, the global autonomous driving market is forecast to be worth US$173.15 billion by 2030. Australia is well-positioned to benefit from the development given its commitment in innovation. According to KPMG 2020 Autonomous Vehicle Preparedness Index, Australia was ranked 15 out of 30 globally with the highest score in a conducive regulatory policy environment for autonomous technology.

In a separate release by The Federal Chamber of Automotive Industries, motorcycle sales surged 22.1% in FY20 to 108,926 units. Off-Highway Vehicles reported a significant growth of 38.8% over the last year to 24,856 vehicles sold in FY20. Off-road vehicles showed strong growth with an increase of 30.3% over last year to 44,697 units. Similarly, road bikes hit 9.2% growth to report 34,912 units. Australians switched to personal transport to drive through regional places during COVID-19. Increasing recreational and community activities also drove the growth.

Key Risks: The industry has seen many products recalls off-late. The Takata airbag recall is the world’s largest automotive recall with an estimated 100 million vehicles globally, including Australia, as per the Department of Infrastructure, Transport, Regional Development and Communications. The household savings ratio although declined to 18.9% in September 2020 quarter as compared to the preceding quarter, but still remains on the higher side compared to historical periods. Since Automotive sales are largely discretionary, change in macro-economic conditions may adversely impact the demand. 

Figure 4: Key Risks in Automotive and Motorcycle Sales:

Outlook: According to the Electric Vehicle Council, electric vehicles are projected to account for 70% to 100% of new vehicle sales by 2040 and to represent at least 30% of the vehicle fleet of Australia. Recently, The Tasmanian Government announced its plans to transition the Government fleet to 100% electric vehicles by 2030 which may augur the demand for electric vehicles, going forward. The government is spearheading the charging infrastructure with an investment of ~$21 million in public charging infrastructure in association with the Australian Renewable Energy Agency to deploy 63 ultra-fast charging sites across all national highways. The deployment of 5G technology is likely to drive autonomous driving. The Australian government committed $160.9 million in Satellite-Based Augmentation System to improve positioning across Australia. A further $64 million is being invested in the National Positioning Infrastructure Capability to add precision for mobile coverage. Considering the above facts and trends in automotive and motorcycle sales, we have figured out 4 stocks on ASX that are set to see the momentum from the development.

(1) Carbon Revolution Ltd. (Recommendation: Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 394.72 Million, Annual Dividend Yield: 0%)

Revenue Surged Backed by Pent-up Demand in FY20: Carbon Revolution Ltd. (ASX: CBR) is a manufacturer and supplier of auto parts and equipment. The company offers carbon fibre wheels and other lightweight technologies to worldwide customers. CBR reported significant jump in sales volumes with 13,942 wheels were sold in FY20, up from 5,700 reported in FY19. This was aided by strong demand from OEMs. The pandemic created supply disruptions, but the company able to meet delivery schedules through alternative shipping methods such as change from air to sea freight. It had added cutting machines and moulding stations which resulted in annualized moulding rate touched a record high of ~30,000 wheels per annum. CBR completed its IPO in November 2019 for capital raise of $57.7 million including primary capital of $30 million and COVID-19 placement of $27.7 million. The company is yet to achieve profit at EBITDA level. Its profitability was affected by delay in conversion of moulded wheels to finished wheels due to the pandemic and surge in cost of consumables. In addition, CBR incurred a one-time costs of $87.2 million towards loss on conversion of financial instruments and IPO issuance costs.

In the Q2 FY21 update, CBR posted revenue of $5.6 million, a decline of 52.8% achieved in Q1 FY21 and lower than last year pcp by 48.1%. Volumes of wheels sold declined to 1,972 in Q2 FY21. It was awarded about 6 new programs by OEMs and of which 2 programs will enter FY21 production. Commercialization using new fascia technology had begun and production volume to ramp-up in the forthcoming quarters. The company refinanced Ronal debt facility with low-cost debt from Export Finance Australia. It had closed the quarter with cash balance of $15.4 million.

Outlook: The company is expecting to realize ~$2 million from release of inventory which was held back during the pandemic. The new moulding technology is to bring down cost per wheel. About half of expected capex in industrialization and machining completed in H1 FY21. R&D expenses is likely to decline and be normal in FY21. CBR is expecting positive cash flow from operations.

Valuation Methodology: Price/Book Value Multiple Based Relative Valuation (Illustrative)

Price/Book Value Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs CBR (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock corrected in last 3 months with returns of ~-0.73%. However, it had gained in the last one months with returns of ~+0.37%. The stock is currently trading slightly above to the average of 52-week high price of $4.40 and 52-week low price of $0.80. CBR demonstrated jump in sales aided by pent-up demand in FY20. It had begun commercialization using new fascia technology for moulding which will lower costs. It had received 6 new programs from OEMs in Q1 FY21, of which 2 programs to enter into FY21 production. The stock performed well over the market volatility index. We have valued the stock using the price to book value multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight discount as compared to its peer average Price/Book Value (NTM Trading multiple), given the severe deterioration in H1FY21 sales volume and negative EBITDA margin historically as compared to the Industry Median. For this purpose, we have taken peers such as GUD Holdings Ltd. (ASX: GUD), ARB Corp Ltd. (ASX: ARB), PWR Holdings Ltd. (ASX: PWH), to name a few. Considering the decent cash balance, management growth plans, valuation and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $2.70 on 8^th February 2021.  

(2) Vmoto Ltd. (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit)

(M-cap: A$ 144.22 Million, Annual Dividend Yield: 0%)

New Launch of E-Vehicles and International Demand Spur Revenue: Vmoto Ltd. (ASX: VMT) is a scooter manufacturing and distribution company. The company manufactures electric powered two-wheel vehicles, petrol two-wheel vehicles and all-terrain vehicles. Total sales volume surged 84% to 19,971 units in FY19. Exports to International (particularly to Europe) made-up the most with 17,257 units. VMT increased the international dealer coverage to 920. It had about 30 dedicated stores operated in FY19. VMT made significant progress in B2B ride sharing with customers in Australia, Canada, Italy, and other markets. EBITDA turned positive in FY19, owing to new launches, increasing online presence, new licensing agreements, new events and exhibition conducted and strong demand from international markets. 

In the Q4 FY20 update, VMT reported 23,547 units sold in FY20, up by 18% posted in pcp. International revenues grew by 24% to reach 21,416 units. It had international orders for over 11,000 units including from B2B customers as of January 2021. VMT is now supplying to seven ride sharing operators globally and now in advanced talks with additional 14 ride sharing operators. It had signed a number of licensing agreements globally for electric two-wheelers. At December 2020, VTM had cash balance of $15.0 million, after paying its bank facilities in full. It had reported positive operating cash flow in Q4 FY20.

Outlook: VMT plans to raise $9.6 million to accelerate its B2B segment. With the European government’s initiatives for electric vehicles, the company believes that it is well-positioned to benefit from it. VMT is expanding its marketing reach and commenced online premiere event wherein which  the company will launch 3 new electric two-wheelers models in Q1 FY2. The company is expecting to secure more orders for food and delivery customers in the B2B segment going forward.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs VMT (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted positive 1-month and 3-month returns of ~28.39% and ~7.22%, respectively. It is currently trading above to the average of 52-week high price of $0.670 and 52-week low price of $0.110. VMT is ramping-up B2C ride-sharing revenues with 14 new operators in advanced talks. It also signed a number of licensing agreements globally for electric two-wheelers. The stock performed well over the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM Trading multiple) as international revenues to boost following the EU announcement on electric vehicles. We also factored the debt repayment and likely launch of 3 new electric vehicle models. For this purpose, we have taken peers such as Carbon Revolution Ltd. (ASX: CBR), Super Retail Group Ltd. (ASX: SUL), National Tyre & Wheel Ltd. (ASX: NTD), to name a few. Considering an improvement in sales in FY20, fund raising plans and growth strategies, valuation and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.520 on 8^th February 2021.

(3) GUD Holdings Ltd. (Recommendation: Hold, Potential Upside: Low Double Digit)

(M-cap: A$ 1.17 Billion, Annual Dividend Yield: 2.94%)

Davey Business Showed Resilient Performance: GUD Holdings Ltd. (ASX: GUD) provides small electrical appliances, lawnmowers, cleaning products, automotive parts, water transfer pumps and water pressure systems, security products, swimming pool pumps, and spa bath controllers. GUD experienced lower automotive sales in H2 FY20 owing to reseller destocking and lower demand. Overall revenue grew by 1% to $438 million in FY20. Automotive sales registered a flat growth over the prior year, while Davey sales continue to grow despite total lockdown in NZ and Europe with sales growth of 3% over pcp. Davey incurred a one-time costs of $6.0 million towards restructuring at business fitness segment and new product cycle plan initiatives. The company not materialized with cost inflation being partly passed on through price hikes. EBITDA margin broadly unchanged at 21.3% in FY20.

GUD completed the acquisition of AMA Group’s Automotive Components and Accessories Division (ACAD) in December 2020. The acquisition strengthens its exposure in fast growing pick-up truck and SUV vehicle segments. The ACAD division reported revenues of $77.3 million and EBITA of $5.8 million in FY20. The transaction is valued at enterprise value of $70.0 million. GUD plans to raise $55 million through private placement and $15 million through share purchase plan. In addition, $20 million is expected to raise from existing debt facilities.

Outlook:  GUD is expecting the ACAD acquisition to be mid-single-digit pro forma in FY21 with EPS accretive post synergies. Leverage to reach 1.8x after considering the fresh debt and fund raising for the acquisition. Considering strong performance in Q1 FY21, the company is now expecting solid revenue growth in H1 FY21.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs GUD (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted positive 3-month and 6-month returns of ~0.87% and ~11.20%, respectively. It is currently trading above to the average of 52-week high price of $13.660 and 52-week low price of $7.120. GUD experienced strong sales in Q1 FY21. With easing of mobility restrictions, management is expecting H1 FY21 to show robust sales. The stock performed well over the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer average EV/Sales (NTM Trading multiple) as the management believes that ACAD acquisition will be EPS accretive in FY21. For this purpose, we have taken peers such as Super Retail Group Ltd. (ASX: SUL), ARB Corp Ltd. (ASX: ARB), National Tyre & Wheel Ltd. (ASX: NTD), to name a few. Considering the synergies from ACAD, resilient performance of Davey business, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $12.810, up by 1.909% on 8^th February 2021.

(4) PWR Holdings Ltd. (Recommendation: Hold, Potential Upside: Low Double Digit)

(M-cap: A$ 456.81 Million, Annual Dividend Yield: 1.29%)

Continue to Invest in Advanced Machining Platforms: PWR Holdings Ltd (ASX: PWH) provides customised cooling solutions for water (radiators), oil and forced induction air (inter-coolers) systems for the global motorsports industry. Sales of racing performance products was affected by the pandemic. Its C&R segment lifted the overall revenues which had posted a flat growth in FY20 over the last year. The company witnessed strong traction in emerging technology products within PWR Performance Products segment.  PWH commenced delivering OEM contract for C&R products and such programs to serve as a core revenue driver going forward. EBITDA margin improved to 35.6% in FY20 benefited from JobKeeper and Pay Check Protection program and reduction in overhead costs. Net profit stood at $13.05 million in FY20. Increased supplies to new industry such as aerospace and the military to drive profit going forward. Its operating cash flows of $20.3 million provides strong support to expansion plans.

In the trading update, PWH is expecting to post EBITDA in the range of $10-$11.5 million for the six months ending December 2020. This includes $1.985 million contributed by Jobkeeper payments. PWH has been awarded a grant of $1.2 million for the state of art aluminium power 3D printer. It had repaid $5 million of loans and cash balance stood at $12 million as of December 2020 with unutilized facilities of $7.5 million from asset financing and $15 million under future financing sources.

Outlook: PWH will continue to invest in robot loaded palletized system and advanced machining platforms which will improve cost synergies, going forward. The company is also diversifying with motorsport, aerospace and military segments which will drive revenues, going forward.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative) 

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

A-VIX vs PWH (Source: Refinitiv, Thomson Reuters)

Stock Recommendation: The stock posted positive 3-month returns of ~-5.99%. But it has yielded positive returns in last one month with ~3.40%. The stock is currently trading above to the average of 52-week high price of $5.280 and 52-week low price of $2.500. PWH continue to invest in new machining technologies and has received award from the government during H1 FY21. The stock performed well over the market volatility index. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We believe that the stock might trade at a slight discount as compared to its peer median EV/EBITDA (NTM Trading multiple) considering its racing performance business which exhibited volatile trend and are influential by economic factors. For this purpose, we have taken peers such as Carbon Revolution Ltd. (ASX: CBR), Bapcor Ltd. (ASX: BAP), ARB Corp Ltd. (ASX: ARB). Considering the decent cash balance and funding availability, growth strategies, valuation and current trading levels, we give a “Hold” recommendation on the stock at the current market price of $4.550, down by 0.220% on 8^th February 2021.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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