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AUTOMOTIVE HOLDINGS GROUP LIMITED

Nov 23, 2015

AHG
Investment Type
Mid - Cap
Risk Level
Action
Rec. Price ($)
Company OverviewAutomotive Group Holdings Limited is a diversified automotive retailing and logistics group with operations in Australia and New Zealand. The Company is an automotive retailer, with operations in Western Australia, New South Wales, Queensland and Victoria. The Company operates in four segments include Automotive Retail, Refrigerated Logistics, Other Logistics and Property. The automotive segment has over 169 dealerships franchise sites operating within the geographical areas of Australia and New Zealand. The refrigerated logistics operations segment consists of its cold storage and transport operations. The other logistics operations segment consists of its automotive parts warehousing and distribution businesses, motorcycle distribution, bus and truck distribution and vehicle storage and engineering. The property segment consists of its direct property interest in land and building.



AHG Dividend Details
 
Outstanding shareholder returns: Automotive Group Holdings Ltd (ASX: AHG) reported a five year (from FY11 to FY15) Compound Annual revenue Growth of 9.4%, while the group’s Operating EBITDA as well as Operating NPAT delivered a CAGR increase of 11.8% and 12.5%, respectively, during the same periods. Automotive Group is targeting to achieve further growth via its restructuring effort coupled with its under?performing operations divestments, Greenfield dealerships additions as well as through acquisitions and growth investments. The group delivered solid total Shareholder returns of around 11% (includes capital growth and reinvestment of dividends) over the last twelve months (as of November 18, 2015), 52% in the last three years and returned more than 156% in the last five years. Meanwhile, Automotive Group’s Net Operating Profit (including adjustments for one?off effects) surged over 10.8% year over year (yoy) to $94.2?milllion in fiscal year of 2015 while reporting a Statutory Profit after Tax rise of 20.8% yoy to $88.1 million during the period. Operating Earnings per Share surged 6% on a year over year basis while AHG’s fully?franked full year dividend reached 22 cents per share during the period. Automotive Group has over 179 franchises at 105 dealerships across four Australian states and New Zealand as of FY15.
 


AHG’s Dealerships network (Source: Company Reports)
 
East Coast and New Zealand contribution drove the automotive division business: Automotive Group Holdings’ Automotive division revenues surged over 10% on a year over year basis to $3,883 million in fiscal year of 2015, as compared to the fiscal year of 2014 driven by better contribution of east coast and New Zealand markets despite the challenging market conditions in Western Australia. Operating Profit before tax of the division surged by 27.8% yoy to $122 million while EBIT rose by 22.7% yoy to $116.9 million during the period. The group is expanding its market beyond WA market by investing in digital strategies. The group’s year to date fiscal year of 2016 operating EBITDA improved by 13.5% yoy to $ 48.8 million boosted by its ongoing east coast and New Zealand markets as well as New and Used car market growth. AHG is targeting the private?to?private market opportunity as well as opening a major used car warehouse at Joondalup to capture the Perth’s growing northern suburbs. Automotive Group’s recent acquisition of Perth’s three Mercedes?Benz dealerships would further strengthen its exposure in this booming luxury car market. AHG has been enhancing this division via several acquisitions and earlier acquired Bradstreet Motor Group, Paceway Mitsubishi WA, Leo Muller CJD Qld and Hillcrest Mazda Qld. Management reported that the VW emissions issues would have a small impact on its present operations as the group has only five Volkswagen dealerships out of a total of 105 dealerships. Automotive Group made huge investments in the new Daimler Trucks Perth dealership near to Perth airport, and management believes this to be among the best truck dealerships and service centers in the world. To leverage mining sector outsourcing opportunities from construction to processing, Automotive Group is also seeking to launch major car and truck service center in the Pilbara region.   
 


Automotive Group Holdings performance (Source: Company Reports)
 
AHG’s Market Opportunity: Automotive Group has built a competitive market position and sells more than 110,000 new and used vehicles a year while generates over ~$1 billion p.a. of auto finance. The group’s target Australian Automotive market is huge with a market size of over $81 billion of which used dealer market accounts over $36 billion, followed by new dealer market which is over $30 billion while P2P market is over $15 billion. Automotive Group accounts over 6.6% of the Australian new car market (estimates over 1,155,000 units for CY2015) while represents around 1.6% of Australian used car market (forecasted over 2,200,000 units with a total value of $51 billion as of CY2015). The group sold over 75,678 new vehicles during fiscal year of 2015, with over 40,000 of private vehicles while 37,856 are used vehicles. On the other hand, the group’s dealership model continues to be strong as most of the consumers are still preferring to buy offline despite searching at online platforms. The group is also enhancing consumer experience by working with direct manufacturers, providing omni?channel prospects in dealership, on?line, tablet, mobile as well as seeking to optimize online leads via chats and queries.
 

Consumers prefer offline purchase for Cars (Source: Company Reports)
 
Refrigerated Logistics division highlights: AHG’s Refrigerated Logistics division revenues witnessed a solid FY15 performance, which grew by 41.7% yoy to $609.1 million driven by the total contribution by the Scott’s acquisition, despite facing transitioning and integrating challenges of acquisitions and cold store expansions. On the other hand, weaker transport demand impacted the organic growth of the division to a certain extent. EBITDA of the Refrigerated Logistics division grew by 52.4% yoy to $45.2 million while EBITDA margin rose to 7.4% in FY15 from 6.9% in FY14. The division’s Cold store utilization reached an average of over 80%. Management reported that its New Erskine Park facility utilization is better than estimated which reached over 89% of capacity as of September 2015 while the group estimates the utilization to reach over 95% by December 2015. The group forecasts to cut “overhang” leases costs by over $2.6 million by FY2016. AHG intends to continue to maintain its restructuring as well as rationalizing efforts for its refrigerated logistics division. The division’s operating EBITDA improved by 2.3% yoy to $15.3 million during year to date fiscal year of 2016. New warehouse technology rollout is ongoing while new transport management system implementation efforts would be finished by CY2016.
 

 
Automotive Group’s logistics division timeline (Source: Company Reports)
 
Other Logistics Highlights: Automotive Group’s other logistics division revenues fell by 13.3% yoy to $365.2 million while the division Profit Before Tax plunged by 62.1% yoy to $5.3 million during fiscal year of 2015. Falling Australian dollar continues to pressure KTM while AMCAP is declining on the back of Mitsubishi distribution model changes as well as costs related to the implementation of new warehouse system. Challenging truck and bus market is affecting the Higer and GTB/VSE brands. Automotive Group’s other logistics division operating EBITDA plunged by 14.1% yoy to $3.2 million during year to date fiscal year of 2016, again impacted by the ongoing KTM pressure and AMCAP impact. The group’s efforts for the sale of its Covs business have been delayed (in view of the objections raised by the Australian Competition and Consumer Commission), further hurting its first quarter of 2016 performance.  On the other hand, the VSE/GTB brands achieved a solid performance during the first quarter of 2016 while the WMC Restructure with Chinese brands is finished during the period.
 
Stock Performance: Automotive Group’s shares have delivered year to date returns of over 9.3% (as of November 20, 2015) and surged over 5.2% in the last four weeks alone. The group intends to continue to reward its shareholders by leveraging its auto dealership model through acquisitions and Greenfield sites. AHG is focusing on its Refrigerated Logistics business and targets to further enhance its efficiencies and synergy. AHG’s non-core business divestments coupled with Group?wide cost?down strategy would boost its cash flow. Meanwhile, the group’s acquisitions Paceway Mitsubishi WA, Leo Muller CJD Qld and Hillcrest Mazda Qld would continue to contribute to its performance in the coming periods. We believe that the stock is trading at a relatively cheaper P/E of 14.7x as compared to its peers while AHG has a decent dividend yield of 5.2%. Based on the foregoing, we give a “BUY” recommendation on the stock at the current price of  $4.28
 



AHG Daily Chart (Source: Thomson Reuters)







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