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
 
Automotive Holdings Group Ltd (ASX: AHG) had been on a tumultuous path in FY17 with various challenges in Automotive division and weakness in Refrigerated Logistics. However, the recently identified stabilising conditions with various dealerships, new acquisitions, and other incentives, along with positive lead indicators in terms of mining activity and truck volumes, indicate for a relatively improved performance for Automotive division while an impact from regulatory changes is still on the cards. Momentum in Refrigerated Logistics at the back of contract wins and cost initiatives is also expected to give a boost to the group.
 
Expanding Newcastle operations: AHG is expanding its footprint via acquiring on track with the growth strategy. The group is acquiring five franchised automotive dealerships trading under Hunter Motor Group at Maitland as well as Rutherford near Newcastle (NSW). The Maitland operations have three automotive franchises (Subaru, Honda and VW Passenger) across two sites on Maitland High St while Rutherford operations have Isuzu UTE and VW Commercial franchises at Mustang Drive in Rutherford. These dealerships would enhance the group’s Newcastle operations, and provide an incremental revenue while AHG is forecasting to drive cost synergies across the five dealerships. The group is considering $8.5 million for goodwill, along with stock and assets at valuation for the acquisitions which will settle in November. The group would hold 185 automotive franchises in Australia and New Zealand post the completion of the acquisition.
 
Softness in bottom line for FY17:The group delivered a revenue rise of 8.1% on a year on year (yoy) basis for FY17 to $6.1 billion. However, the Operating NPAT fell 10.2% yoy to $87.3 million impacted by the automotive division. The statutory profit after tax (prior to $39.8 million of unusual items) fell 38.4% yoy to $55.5 million, as compared to the earlier year. Operating (Non-IFRS) EBITDA fell to $216.0 million during the year as compared to $225.5 million in the prior corresponding period. The group’s Operating (Non-IFRS) EBITDA margin fell to 3.6% in FY17 against 4.0% in FY16 and Operating (Non-IFRS) NPAT fell to $87.3 million for FY17 from $97.2 million in the same period last year while Operating (Non-IFRS) EPS lost to 26.7 cents for FY17 against 31.7 cents in FY16. As a result, the group’s fully-franked full year dividend was slashed to 19.0 cents per share from 22.5 cents of prior corresponding period (pcp). However, the dividend was still above the market expectations given the headwinds the group faced in FY17. On the other hand, AHG had opened easyauto123 warehouse locations at Seven Hills (NSW) and Canning Vale (WA) during the year.
 

FY17 Performance (Source: Company reports)
 
Efforts on revamping Automotive division: The group’s automotive division’s revenue rose 10.8% yoy to $5.23 billion for FY17. On the other hand, the Operating EBITDA was under pressure, which fell 3.9% yoy to $171.0 million, leading to a weak Operating profit before tax fall of 8.5% yoy to $124.2 million. This pressure was mainly on the back of weak Western Australian market. Moreover, there was a major decrease in the contribution from the online broking business 360 Finance. On the other hand, the group’s performance in the Australia as well as New Zealand markets showed solid sales of new vehicles in 2016 and is on track to exceed these levels in 2017. Moreover, the group believes that the expanding portfolio and strategic locations might offset the pressure of the economic conditions in Western Australia. The group’s used car operations’ solid performance has been driven by organic growth as well as expansion of easyauto123 fixed-price used car warehouse model from one pilot location to a second in Sydney’s Seven Hills in April 2017 and a third at Canning Vale, south of Perth, in May 2017. The group opened fourth warehouse at Brooklyn in Melbourne’s inner west in August and is planning for fifth in Brisbane this year. The group has finished strategic acquisitions which include the Lance Dixon Jaguar Land Rover dealership at Doncaster in Melbourne’s inner eastern suburbs, the City Mazda dealership in South Melbourne, the Audi and Skoda dealerships in Newcastle, and the Essendon Ford and Mitsubishi dealerships and Daimler Trucks Laverton in Melbourne’s west.
 
Focusing on cost control in Refrigerated Logistics division: The group’s Refrigerated Logistics top line lost over 1.7% in FY17 to $570.735 million but the EBITDA performance fell over 36.9% on a yoy basis. This weakness is mainly due to the group’s transformation program during FY17. The division’s margins were impacted by the rising fixed cost base from investment in cold stores and equipment combined against pcp. Refrigerated Logistics operations accounted for 9% of revenue as of FY17 and 13% of statutory EBITDA for FY17. On the other hand, the division delivered an outstanding performance in the second half of the year, with EBITDA rising 68% as compared to pcp. The group also slashed the division’s headcount that led to a major fall in pallet costs as well as enhanced the use of fleet assets with a corresponding reduction in the use of sub-contractors, and the consolidation of facilities. Overall, the division’s restructuring efforts have been showing improvements; and upgrading of technology platforms while leveraging operational efficiencies as well as controlling cost reductions are expected to provide benefits.
 
Healthy performance in Other Logistics division: The group delivered a healthy performance for other Logistics division, wherein the operating profit before tax in Other Logistics surged 115.6% on a yoy basis even though the revenues from continuing operations fell 13.8%. This operating profit before tax performance was driven by the divestment of the former Covs business. The AMCAP business performance was consistent while the motorcycle business delivered a solid performance driven by market demand and favorable foreign exchange. The GTB/VSE business showed solid performance driven by better client demand and productivity gains. The group is now targeting provisions in FY17 financial statements, which are reflected in the unusual items, to facilitate a restructure of the operations of this business in FY18.
 

Other Logistics (Source: Company Reports)
 
Outlook:For FY18, the group expects a modest uplift in the operating performance driven by the cost reduction programs as well as ongoing progress in Refrigerated Logistics. The group sees that the Western Australian economy is now stabilizing and believes that it is well positioned to leverage the recovery in the state. New vehicle sales in Australia and New Zealand are expected to perform strongly going forward. The positive developments including the expected rise in new vehicles sales might offset the regulatory changes’ impact to FY18 insurance income in the Automotive division, as per the group’s expectations. AHG also believes that the changes to flex finance commission payments in FY19 will have little impact on it. Meanwhile, AHG expects the Refrigerated Logistics transformation program to reap benefits in FY18 and beyond.
 

Capital Management Position (Source: Company Reports)
 
Stock performance: The shares of AHG fell over14.4% in the last three months (as of October 27, 2017) as the group’s performance was impacted by tough economic conditions in Western Australia, coupled with tightened credit conditions in the automotive industry as well as a soft performance in Refrigerated Logistics over the full year. On the other hand, the group is pursuing options in the digital space in the automotive division to engage both buyers as well as sellers in the Australian private to private (P2P) market, which is forecasted to be in the order of $15 billion annually. The group is controlling the costs, as well as pursuing opportunities that align with the growth strategy. Moreover, management has lately reported that the Western Australian economy has stabilized and started showing the “green shoots” of improvement, which leaves AHG well-placed to leverage many opportunities. The group will hold its Annual General Meeting on November 24, 2017. We give a “Buy” recommendation on the stock at the current price of $3.20

 
AHG Daily Chart (Source: Thomson Reuters)

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