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
 
Inking Ford and Mitsubishi dealerships:In April 2017, Automotive Holdings Group Ltd (ASX: AHG) announced about acquiring the Ford and Mitsubishi dealerships at the Essendon Fields automotive precinct near Melbourne. AHG is also developing a new Jaguar and Land Rover dealership on a Greenfield site at Essendon Fields. The existing dealerships are expected to be immediately earnings accretive and the company expects to drive both incremental revenue and cost synergies across the two dealerships. The transaction is firmly in line with the ongoing automotive aggregation strategy and has an excellent opportunity to secure dealerships that can be integrated into an AHG retail hub. Moreover, the Essendon Ford and Mitsubishi acquisition involves a total consideration of $8.5 million for goodwill, plus stock and assets at valuation. It is subject to customary conditions, including manufacturer approvals, and is expected to settle in May. After the completion of the transaction, AHG will hold 184 automotive franchises at 111 dealership locations in Australia and New Zealand.
 
First half Financial Year 2017 Performance in line with the trading update:AHG in the first half of FY 17 ended December 31, 2016, has reported an 11.3% fall in the operating NPAT to $43.9 million, which is in line with the company’s trading update at its Annual General Meeting in November. Operating NPAT included approximately $4.2m, which are gains from profit on sales of property and securities. The statutory NPAT fell 19.8% to $38.7 million on prior corresponding period (pcp). The earnings per share is impacted by raising of the equity and lower profit. There is an unusual item that includes Refrigerated Logistics transformation costs and CEO?MD transition costs in the first half. Moreover, AHG in the H1 FY17 has posted the operating cash flow of $17.1 million compared to $15.4 million 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, tax refunds received post December 31, and delayed payment by large Refrigerated Logistics client now received. Additionally, the recent equity raised has funded $65 million of acquisitions of Doncaster Autos, City Mazda, 360 Finance, Laverton Trucks and Newcastle Audi/Skoda.
 

H1 FY17 Financial Performance (Source: Company Reports)
 
Strong Automotive Segment Performance in H1 FY17: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 strong Automotive revenue and earnings growth in NSW and New Zealand, and above?budget results in Queensland and Victoria which, with the contribution of recent acquisitions, has increased Automotive Operating EBITDA to $88.6 million, indicating a growth of 10.3% over 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 showed some signs of weakness in H1 but has witnessed a stronger start to H2.AHG is also preparing to mitigate expected market changes evolving from ASIC reviews of Finance & Insurance commissions (relating to ban on flex commission proposed to be implemented in 2018). However, AHG expects to have minimal impact from the regulatory changes.
 

Automotive Segment Performance in H1 FY17 (Source: Company Reports)
 
Operational Performance of Refrigerated Logistics in H1 FY17:The operational performance of the Refrigerated Logistics in H1 FY17 is trending in line with plan. The revenue from the segment was down 7.2% pcp, but continued to build from Jan 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. Moreover, the transformation program is on schedule with specific consulting costs treated as “unusual” given the one?off nature. The business is now managed by single management structure 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 stronger second half based on revenue growth and cost?out expectations.
 

Operational Performance of Refrigerated Logistics in H1 FY17 (Source: Company Reports)
 
Operational Performance of Other Logistics in H1 FY17:AHG has posted a 20.5% fall in the revenue of the other logistics in H1 FY17. The reduction in revenue reflects divestment of Covs and the pcp included the restructure of WMC operations. However, the margins of the segment improved. Moreover, the outperformance in KTM was noted due to the favorable forex offsetting weaker truck parts market in AMCAP.
 

Refrigerated Logistics Transformation (Source: Company Reports)
 
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, mitigated by strength in NSW, Victoria and NZ. 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 expects these changes to commence across the industry after the current financial year with an extended transition period. However, AHG does not expect to change 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 Automotive Holdings Group 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.

Stock Performance: The shares of Automotive Holdings Group have corrected over 9.1% in the last four weeks (as of May 12, 2017) on concerns over weakness in retail sentiment in Australia. Over 83,135 vehicles were sold during the month of April, which is a 5.1% decrease against the corresponding period in last year. The overall market sentiment lost over 2.8% in this year-to-date, as per Federal Chamber of Automotive Industries data. On the other hand, the company is positioning to withstand this pressure while its Automotive Division expects a better performance for the second half and additional earnings support might come in from further auto acquisitions. The group’s cost cutting efforts coupled with their transformation program are expected to deliver benefits to the other segments as well. Meanwhile, post the stock correction, AHG is now available at reasonable levels. The company’s stock is having a strong dividend yield and is trading at a reasonable level. We give a “Buy” recommendation on the stock at the current price of $ 3.69  

 
AHG Daily Chart (Source: Thomson Reuters)

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