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
First half of Financial Performance in 2017 in line with expectations: Automotive Holdings Group Ltd (ASX: AHG) reported an 11.3% fall in the operating NPAT to $43.9 million in the first half of FY 17 ended December 31, 2016. On the other hand, this trading update was as per the expectations revealed during the Annual General Meeting in November 2016. Operating NPAT included over $4.2 million, which are gains from profit on sales of property and securities. There have been unusual items including Refrigerated Logistics transformation costs and CEO?MD transition costs in the first half. The statutory NPAT fell over 19.8% to $38.7 million during the period as compared to prior corresponding period. Accordingly, the earnings per share were impacted by raising of the equity and lower profit.
 

First half of 2017 Financial Performance (Source: Company Reports)
 
Strong Automotive Segment Performance in 1H 17: The group’s Automotive division had seen strong broad?based growth across its diversified portfolio of brands and locations, which had allowed it to mitigate the widely-acknowledged downturn in the Western Australian economy. The company has posted a strong Automotive revenue and earnings growth in NSW and New Zealand, and above?budget results in Queensland and Victoria.  Moreover, with the contribution of recent acquisitions, the group was able to enhance their Automotive Operating EBITDA to $88.6 million, which is a growth of 10.3% against the pcp. The segment’s revenue grew 11.8% and the Automotive segment’s EBITDA and EBIT margins are maintained. Moreover, there were significant acquisitions in the Automotive segment, that includes City Mazda Vic, Doncaster JLR Vic and Audi/Skoda in Newcastle. The company has a national expansion of Daimler Truck relationship with acquisition of Laverton dealership in Victoria. Further, the rollout of easyauto123 model is gaining momentum with strong performance in existing Joondalup site. However, the heavy truck market was weak in H1 but made a stronger start in the second half of 2017. AHG is making preparations to mitigate expected market changes evolving from ASIC reviews of F&I commissions.
 

Automotive Segment Performance in the first half of 2017 (Source: Company Reports)
 
New client wins in Refrigerated Logistics: The operational performance of the Refrigerated Logistics in the first half of 2017 has been reported to be trending in line with plan. The revenue from the segment was down 7.2% as compared to the prior corresponding period, but continued to gain momentum from January 2016 with new client wins and clear focus on client service. The margins from the Refrigerated Logistics reflects higher fixed cost base from the recent investment in cold stores and equipment. There is a minimal financial benefit from the transformation program impacting the first half. Meanwhile, the transformation program is on schedule with specific consulting costs treated as “unusual” given one?off nature. The group has also aligned to have a single management structure to manage the business across the four trading brands. Further, the technology platform is now aligned to new operating model with planning underway for final testing and implementation. Overall, AHG is targeting a stronger second half based on revenue growth and cost?out expectations. AHG aims to have FY17 run rate savings to be >$20 million at the back of reorganizing operations into a national business.
 

Operational Performance of Refrigerated Logistics (Source: Company Reports)
 
Operational Performance of Other Logistics in 1H 17: AHG has posted a 20.5% fall in the revenue of the other logistics in 1H 17 owing to divestment of Covs. There has been restructuring of WMC operations impacting the performance. However, the margins of the segment improved. Moreover, the strong outperformance in KTM was on the back of the favorable forex offsetting weaker truck parts market in AMCAP.
 
Balance sheet highlights: The group raised $65 million to fund their acquisitions including Doncaster Autos, City Mazda, 360 Finance, Laverton Trucks and Newcastle Audi/Skoda. But given these acquisitions, the group’s inventory increased during the first half. AHG also enhanced their working capital in the first half of 2017 but this impacted their net debt. Meanwhile, the group incurred a capital expenditure of $54 million in the first half. The group has posted the operating cash flow of $17.1 million compared to $15.4 million of pcp. The operating cash flow is in line with pcp but lower than historical levels. The weaker operating cash flow has resulted from the lower profit level. The cash flow got impacted significantly by timing events with approximately $40m increase in working capital, prepayment of annual insurance premiums, the annual automotive manufacturer rebates received post December 31, 2016, tax refunds received post December and delayed payment by large Refrigerated Logistics client now received.
 
Outlook for FY 17: AHG expects the Automotive division to continue to deliver a strong performance in the second half of FY 17. There will be further expansion of the easyauto123 warehouse model in the second half of the year. There is continued strategic investment in the Automotive acquisitions and targeted Greenfield developments. However, WA Auto is expected to remain challenging in the short?term, while strong performance in NSW, Victoria and NZ is expected to prevail. Moreover, the current ASIC and ACCC reviews of finance and insurance commissions, which once finalized, will most likely lead to industry?wide changes to the revenue mix and cost base at dealership groups and the relative shares of vehicle sales margins, finance and insurance sales, aftermarket and vehicle servicing. AHG expect these changes to commence across the industry after the current financial year with an extended transition period. However, AHG does not expect to have changes to the company’s position as Australia’s largest automotive retailer, and the company will continue to be one of the best places for consumers to buy a new or used vehicle, along with convenient complementary products and strong after?sales support. Additionally, in Refrigerated Logistics business segment, AHG expects to see significant savings and margin improvement from the transformation program and there are strong prospects for increased revenues from new contracts. AHG also anticipates a solid finish to the financial year from the Other Logistics division. In addition, as announced in November by AHG, the company has reaffirmed its outlook, and continues to expect to deliver a full year operating NPAT outcome ahead of FY2016. AHG will actively manage the portfolio of assets to drive the shareholder value.


Performance History (Source: Company Reports)
 
Stock Performance: AHG stock lost over 6.2% in the last six months (as of March 17, 2017) as the group already forecasted a weak performance. On the other hand, the stock recovered over 5.48% in the last three months and consolidated over 1.8% in the last four weeks (as of March 17, 2017). The group has a solid presence in growth markets in NSW and Vic while performing decently at WA even though the market is tough. The group would be paying a distribution amount of AUD 0.095 on April 05, 2017. Meanwhile, the group’s stock also has a lucrative dividend yield and is trading at a reasonable level. The group’s Automotive business momentum might continue given the ongoing market growth.  National roll?out of easyauto123 warehouse model would further drive their business. From flex commission proposed ban point of view, the changes (if any) are likely to commence in late 2018, and thus, no or minimal impact in FY17 or FY18 is forecasted as of now. Further, AHG is believed to undertake steps to negotiate new commission models with lenders for remuneration structures to be in place by the time the new legislation is enacted. We believe the current momentum would continue in the coming months; and based on the foregoing, we give a “Buy” recommendation on the stock at the current price of – $ 4.03

 
AHG Daily Chart (Source: Thomson Reuters)

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