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
 
Consumer credit conditions impacting the automotive financing market: In Western Australia, the new vehicle sales market has further declined and was down 10% year to date (ytd) in CY2017 (as on 25 May 2017). Although Automotive Holdings Group Ltd (ASX: AHG) has grown its market share in Western Australia over the current year, the market contraction has led to lower than expected sales revenue and earnings from the automotive business. Moreover, the tightening consumer credit conditions in the automotive financing market have contributed to lower margins across the industry. This has been particularly evident in AHG’s online 360 Finance business and more broadly across the Company’s automotive dealerships. The weakening east coast auto market (new vehicle sales down ~3% against the previous corresponding period for the first four months of CY2017) combined with the tighter credit conditions has also reduced the capacity of east coast earnings to provide cover for WA. During H1FY17, Automotive division has seen strong broad?based growth across its diversified portfolio of brands and locations. The company has posted strong Automotive revenue and earnings growth in NSW and New Zealand, and above?budget results in Queensland and Victoria. Additionally, with the contribution of recent acquisitions (City Mazda Vic, Doncaster JLR Vic and Audi/Skoda in Newcastle) Automotive Operating EBITDA was increased 10.3% year on year (yoy) to $88.6 million, while revenue grew 11.8%.


Automotive Operating Performance; (Source: Company reports)

Refrigerated Logistics business continues to deliver improvement in earnings: The transformation program has been underway in the Refrigerated Logistics business and, continues to deliver improvement in earnings due to momentum of the revenue growth and cost reductions. The second half earnings in FY2017 have been expected to be significantly higher than the corresponding period in FY2016, however, the timing of the full year benefits from the transformation program are slightly behind initial expectations. The revenue from the segment was down 7.2% prior corresponding period (pcp) in H1 FY17, but continued to build with new client wins. The margins from the Refrigerated Logistics reflected higher fixed cost base due to investment in cold stores and equipment. Further, the technology platform is now aligned to new operating model with planning underway for final testing and implementation.


Refrigerated Logistics Operating Performance; (Source: Company reports)

Cost reductions and closing of nonperforming businesses: Following a strategic review and in response to the proposed ASIC changes (relating to ban on flex commission proposed to be implemented in 2018) to automotive finance and insurance regulations, the company has undertaken a cost reduction program and decided to close a few nonperforming businesses. Further, these initiatives are expected to deliver pre?tax savings of circa $10m per annum and result in restructuring costs of circa $35m. Most of these costs are non?cash and will be classified as unusual in nature and impact statutory NPAT for FY2017. Refrigerated Logistics results were trending in the right direction, and the investment made in the transformation program was beginning to deliver the expected performance improvements. Currently, the Company is focused on making structural changes to meet the changing market conditions, and cost reductions. Importantly, AHG continues to see the benefits of holding a diversified automotive portfolio both in terms of brands and geography across Australia and New Zealand.

Strong remarketing platform with multiple pathways to expand the business:  In May 2017, AHG has acquired a majority stake in the Carlins Auction Group business to establish a national platform to allow AHG to expand the existing Carlins vehicle re?marketing platform in Melbourne, Sydney and Brisbane. The acquisition complements the company’s franchised dealerships and the easyauto123 non?franchised used car strategy. The Carlins business is a wholesale platform and, will remain operationally independent from easyauto123, although the two businesses will be co?locating in Melbourne and Brisbane. Notably, the transaction gives AHG access to a platform and management team that is well regarded in the industry. This is a significant strategic move for AHG that will allow it to access a strong remarketing platform with multiple pathways to expand the business. The Carlins team buys and sells around 7,500 vehicles (close to $60m) per annum through its network of wholesale buyers and contracted relationships with dealers and OEMs. It also handles approximately 5,000 consignment vehicles annually, while less than 10% of those 12,500 vehicles are sold to retail customers.
 

New vehicle registrations; (Source: Company reports)
 
Ford and Mitsubishi dealerships to drive incremental revenue and cost synergies: Recently, AHG has acquired the Ford and Mitsubishi dealerships at the Essendon Fields automotive precinct near Melbourne. Additionally, AHG had announced about developing a new Jaguar and Land Rover dealership on a greenfield site at Essendon Fields. The Essendon Fields precinct is a well?recognised retail automotive location and these acquisitions add to its presence in Melbourne. Moreover, these dealerships are expected to be immediately earnings accretive and expected to drive both incremental revenue and cost synergies across the two dealerships. The Essendon Ford and Mitsubishi acquisition involves a total consideration of $8.5?million for goodwill, plus stock and assets at valuation. Post the transaction, AHG is holding 184 automotive franchises at 111 dealership locations in Australia and New Zealand.

Weakness in H1FY17 performance: For H1FY17, AHG has reported an 11.3% decline in the operating NPAT to $43.9 million (included approximately gains of $4.2m 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 was impacted by raising of equity (to fund acquisitions of Doncaster Autos, City Mazda, 360 Finance, Laverton Trucks and Newcastle Audi/Skoda) and lower profit. The cash flow was impacted significantly by timing events with approximately $40m increase in working capital, prepayment of annual insurance premiums, and delayed payment by large Refrigerated Logistics clients.


H1FY17 Financial performance; (Source: Company reports)
 
Outlook for FY 17: WA Auto division 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 are expected to lead to industry?wide changes to the revenue mix, cost base and operating margins. However, AHG does not expect material impact as it is an Australia’s largest automotive retailer, and continues to be one of the best places for consumers with convenient complementary products and strong after?sales service. AHG expects to see significant savings and margin improvement from the transformation program in Refrigerated Logistics business segment, and is expecting to deliver a full year 2017 Operating profit after tax in the range of A$87m to A$89m (down 8.4% - 10.4% in comparison to FY16).
 
Stock Performance: The stock has declined 8% in the last six months and corrected over 24% in the past one year (as at August 20, 2017), owing to concerns over weakness in retail sentiment and low consumer spending in Australia. Further, tighter consumer credit conditions in the automotive financing market is leading to lower margins across the industry. However, the group’s cost cutting initiatives coupled with the transformation programs are expected to offset the impact to some extent. We believe that post the recent correction, the shares are trading at low valuations with strong dividend yield. Although the current environment looks challenging, AHG’s position in the automotive landscape can help it withstand the downtrend and long-term prospects are expected to be driven by group’s track record and acquisition strategies. The stock has been up about 2% in last one month (as at August 20, 2017). We give a “Buy” recommendation on the stock at the current price of $3.64
 

AHG daily chart (Source: Thomson Reuters)

Disclaimer

The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.