Company Overview - Automotive Holdings Group Limited is an automotive retailing company in Australasia. The Company's principal activities include automotive retail, refrigerated logistics and other logistics. The Company's segments include Automotive Retail, Refrigerated Logistics, Other Logistics and Property. Its Automotive Retail segment has approximately 190 motor vehicle franchises at over 110 dealership locations operating within the geographical areas of Australia and New Zealand. Its Refrigerated Logistics segment consists of the Company's cold storage and transport operations. The Other Logistics segment consists of the Company's automotive parts warehousing and distribution businesses, motorcycle distribution, bus and track distribution, and vehicle storage and engineering. Its Property segment consists of its direct property interests in land and buildings. The Company also operates national refrigerated transport and storage, and truck and trailer bodybuilding, among others.
 

 

AHG Details
Decent revenue growth: Automotive Holdings Group Ltd (ASX: AHG) reported a 7.2% increase in revenues to $5.25 billion for fiscal year of 2016. Despite this huge rise, the earnings per share grew 2.4% to 28.7 cents per share, due to slower than operating profits growth at the back of rising costs related to acquisitions and a few one-offs like impairment of assets. On the other side, AHG reported a decent revenue growth on the back of good growth from Automotive Revenue, which was up 10.6% to $4.7 billion for fiscal year of 2016. The statutory NPAT rose over 2.2% to $90.1 million. Automotive retail operations account for the major part of the group’s revenue which is 84% as of fiscal year of 2016 as compared to 81% of Revenue in prior corresponding period. This division accounts for 82% of statutory EBITDA for FY2016. Meanwhile, AHG in five years from 2012 has grown at a Compound Annual Growth Rate (CAGR) for revenue at 7.4%, Operating EBITDA has grown at a CAGR of 8% and Operating NPAT has grown at a CAGR of 8.6%. Moreover, AHG has completed several significant automotive acquisitions and Greenfield developments in FY 16. The auto acquisitions completed in FY16 include Western Pacific Mercedes-Benz (Perth), West Auckland Nissan, Knox Mitsubishi (Melbourne), and Sinclair Hyundai (Penrith). The Greenfield developments include the development at Hillcrest Mazda (Queensland) and Aspley Nissan (Queensland). AHG outlook for new vehicle sales in Australia and New Zealand is strong except in Western Australia.

 

Fiscal year of 2016 Performance highlights (Source: Company Reports)
 
Boosting capital position: AHG had raised $110 million in September 2016 through institutional and retail investors to make the balance sheet strong and to support the company’s future growth strategy. The group is building its balance sheet, wherein their overall assets enhanced by $0.23 billion from $1.96 billion to $2.19 billion as of fiscal year of 2016, on the back of a combination of acquisitions and working capital / non-current asset investments during the period. Overall liabilities enhanced $0.21 billion to $1.47 billion as of FY2016 against the prior corresponding period. Net debt (borrowings excluding finance company loans and cash and cash equivalents) surged $38.41 million to $274.02 million from $235.61 million in 2015 driven by rising operating cash flows by $26.50 million to $139.81 million from $113.31 million in same period of last year.
 
Mixed Trading Update for the first quarter of FY 17: AHG expects to get significant benefits over the short to medium term from the national expansion of its used car strategy, branded as EasyAuto123. AHG is also pursuing opportunities in the non?conventional and digital car sales space. The EasyAuto123 pilot dealership in Joondalup, in Perth’s northern suburbs, has performed well and AHG is expanding this business nationally during FY 17. AHG would be expanding the roll?out of the EasyAuto123 in the fixed?price retail format. In addition, in the first quarter FY 17, the unaudited group operating EBITDA fell 7.8% to $62.7 million than the prior corresponding period.  This is due to a reduced contribution from AHG’s Refrigerated Logistics division, while the division’s performance trending is expected to be in line with the second half of FY16. AHG is expecting a major improvement in earnings from Refrigerated Logistics in the second half of FY17, as the division realizes cost savings from the major transformation program and delivers on its revenue growth pipeline. Moreover, the automotive business has delivered the growth of 8.4% in the first quarter of FY 17, which has come from the strong performances of the dealerships in Sydney, Newcastle, Melbourne and Auckland. However, this trend was offset by the challenging conditions in Western Australia wherein the private buyer sales fell 14.9%. The Other Logistics division grew 18.5% in the first quarter of FY 17 as compared to corresponding period primarily due to KTM. Further, AHG is expecting to deliver a FY 17 Operating NPAT outcome ahead of the FY2016.
 

First quarter of FY 17 Trading Update (Source: Company Reports)
 
Turnaround for Refrigerated Logistics: In FY 16, AHG had posted a 4.7% fall in the revenue of Refrigerated Logistics division to $580.4 million. However, the operating profit before tax fell 59.6% to $8.2 million while operating EBITDA of $37.2 million fell about 17.9% for the Refrigerated Logistics division. The major reasons that affected the division are fall in east-west volumes as there was slowdown in WA mining, coupled with changes to the supermarket retail model with entry of new competitors. These factors crushed the margins while drove volumes of imported goods direct to port of consumption. Therefore, AHG has undertaken the transformation program to improve EBITDA in FY2017 of the Refrigerated Logistics division. This includes implementation of the new operating model to eliminate duplication and costs, streamline processes and improve productivity in a single commercial structure that is aligned to customers’ needs and relationships. There will be four distinct transport segments, Fresh, Chilled, Frozen and General. The standalone warehouse division with separate P&L and single commercial structure is aligned to customer needs and relationships. Moreover, for productivity improvements there will be operational efficiencies and better standardization and automation, while the group is making efforts to cut duplicate functions and unnecessary activities and facilities. Additionally, the steps are taken for technology improvements. On the other hand, there was a press speculation related with AHG initiating a formal sale process for Refrigerated Logistics division but AHG has capped the rumors and confirmed that the sale of the business has not progressed. Overall, AHG is restructuring the Refrigerated Logistics division to return to low double?digit EBITDA margins in FY 18 and intends to generate FY17 run rate savings of more than $20 million.
 
Improving outlook of the company: AHG’s outlook for new vehicle sales in Australia and New Zealand is strong except in Western Australia. AHG would continue its growth strategy including the Greenfield developments and acquisitions leveraging the growing Automotive market. Further, AHG expects to get major potential benefits from the national expansion of its used car strategy with the national roll?out of easyauto123. Moreover, AHG’s board and management are closely monitoring the outcome of reviews by ASIC into commissions paid to dealerships by financiers and insurers. As the industry is responding to the future regulatory reforms, AHG is positioning to withstand any future impact while the group does not expect any major impact on earnings in FY 17. Additionally, AHG is working on major improvement for Refrigerated and Other Logistics. AHG is focusing on the broad transformation program designed to drive efficiencies and synergy savings in FY 17 and beyond. With these efforts, the group is targeting to boost customers’ needs and relationships. AHG is constantly reviewing the underperforming businesses while manage their portfolio of assets to enhance the shareholder value.
 

History of Sustained Growth (Source: Company Reports)
 
Stock Performance: AHG stock price fell about 11% in last three months but surged over 4.6% in the last five days (as of December 16, 2016). We believe there is upside to the stock price in the coming months. The group recently extended their sponsorship of the Melbourne Football Club in the AFL. With this partnership, the group AHG’s automotive dealerships are expected to get strong brand exposure especially in Victoria which has 39 car and truck franchises at 22 dealerships. AHG stock has a strong dividend yield and is trading at a reasonable P/E. We give a “Buy” recommendation on the stock at the current price of – $3.83

 
AHG Daily Chart (Source: Thomson Reuters)

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