I. Sector Landscape and Outlook

The automobile and component industry broadly encompasses several activities which include manufacturing of vehicles, motorcycles, repairs and services of vehicles, parts aftermarket, and retailing. Australia is one among the 15 nations in the world with the capability in producing a car from a design concept to final delivery. Being the most innovative country in the world with sizeable R&D spend and with top scientific institutions, Australia leads advanced manufacturing. It had introduced Electronic Stability Control in vehicles earlier than any other market. The economy is progressing in Electric Vehicles with robust growth following several government initiatives. Australia is now preparing to enter autonomous driving.

The automotive industry housed nearly 68 brands offering 380 vehicle models that are sold and serviced by 4,000 dealers. With ~1.1 million new vehicles sold every year, the industry had a direct impact on the economy by roughly 1.1% (to the GDP), according to the data by the Federal Chamber of Automotive Industries (FCAI). The automotive industry serves as the largest employment base with 270,470 employees, representing ~2% of the total Australian workforce.

Due to continued losses and appreciation of Australian dollars, foreign car manufacturers have wind down local production in Australia. The closure of Ford, Toyota, and Holden (a subsidiary of General Motors) between 2016 and 2017 were marked events in the history of Australia. Almost all vehicles in Australia are currently imported according to FCAI. The Australian, Victorian and South Australian governments provided transitional support to the industry. According to the Department of Industry, Sciences, Energy and Resources, the Automotive Transition Scheme provided support to the extent of $1.044 billion that helped local companies in the supply chain to remain in the business. It is found that ~75% of these companies survived and existed in 2020.

New car sales surged in the last two months of 2020 as business buyers took advantage of the federal government’s asset write-off scheme and the state government’s road infrastructure projects. Sales to individuals surged by 40% in December 2020 from the year-ago levels driven by the pent-up demand and easing of travel restrictions. Australians took road trips for safety travel with their families. Overall new car sales increased by 13.5% to 95,652 vehicles in December 2020 over the last year, according to the data by the Federal Chamber of Automotive Industries (FCAI). For the full-year, sales of new cars declined by 13.7% to 0.92 million indicating inventory destocking by dealers and closures.

Figure 1. New Car Sales Showed a Sharp Decline in FY20:

In the latest update, sales improved during the first two months of 2021 with 83,977 new vehicles sold in February 2021, an increase of 5.1% over pcp. Light Commercial Vehicles and Passenger Vehicle segments showed strong growth. By states, New South Wales showed an uptick in sales (+33% YoY) in recent months, followed by Queensland, while sales decelerated at Victoria.

Toyota continues to earn trust during tough times. It continues to be Australia’s top-selling brand for a straight 18 years in a row according to FCAI data. The Toyota HiLux ute and Toyota Corolla continue to be the top-selling models, while The Toyota RAV4 was the top-selling SUV for the first time in 2020.

Figure 2. Toyota Holds the Market Leadership Followed by Mazda and Hyundai in FY20:

According to The Australian Bureau of Statistics, motorcycle registration decelerated with 1.2% growth in FY20 to reach 8.80 million, as compared to 7.8% growth in FY19. New South Wales, Queensland, and Victoria showed strong growth, while Western Australia experienced a decline. Dealers carried limited vehicles during the lockdown that impacted sales. In a separate report by FCAI, sales of Off Heavy Vehicles reported a strong growth in FY20 followed by off-road vehicles with +38.8% and +30.3%, respectively. Scooters showed a decline of 11% over pcp.

Figure 3. NSW Historically Showed Strong Offtake for Motorcycles:

More Australians are willing to purchase Electric Vehicles (EV) as their next car, according to the survey by The Electric Vehicle Council, an industry body for Electric Vehicles in Australia. The sale of EVs has been upward trending in Australia with 6,900 EVs sold in 2020, up by 2.7% over last year. While the pace has been moderated due to COVID-19, but overtakes sale of petrol/diesel vehicles which had shown a declining trend in the last two years. In a separate report by The Australian Bureau of Statistics, EV registration doubled with 14,253 vehicles in 2020, albeit less than 0.1% of the total fleet size in Australia. Australia had 2,307 public charging stations, of these 357 are fast-charging stations. There were about 28 EV models for sale in 2019.

However, Australia is lagging other countries with EV sales accounted for just 0.7% of new vehicle sales in 2020. The lack of a national electric vehicle policy acts as a barricade for the supply of EVs in Australia. Overpriced models and lack of public fast-charging stations are discouraging factors affecting EV sales.

Figure 4. EV Showed Resilient Performance:

ACT is the clear winner in the number of EVs sold. The government of ACT has taken several measures supporting EVs such as Transition to Zero Emissions Vehicles Action Plan 2018-21 and Climate Change Strategy 2019-21. It plans to achieve zero-emission starting from 2020-21 in all government leased fleet vehicles. The state government also develops a plan to transition the Transport Canberra bus fleet to 100% zero-emissions vehicles by 2040.

Figure 5. ACT Topped the Chart in EV Sales:

The Australian government is gearing up for driverless autonomous vehicles. The National Transport Commission’s Automated Vehicle Program highlighted safety and guidelines for autonomous vehicles that are being tested in various projects such as NSW autonomous buses, Sydney’s Olympic Park, driverless electric Intellibus on public roads of WA. Mining companies have used autonomous vehicles within closed sites for several years. According to KPMG, Australia is placed at 15 among the top 30 countries in the Autonomous Vehicles Readiness Index in 2020. The strength of the nation lies in the ease of government regulations for autonomous vehicles, openness in data sharing, and strong broadband infrastructure.  

Index Performance:

The ASX 200 Automobiles & Components (Industry Group) generated one-year returns of ~+63.47% as compared to ~+6.96% by the ASX 200 Index. Strong progress in electric vehicle sales with increased government support and charging infrastructure, the transition to autonomous driving, advanced manufacturing, and increased affordability of households helped to post the index gains.

Figure 6: The ASX 200 Automobiles & Components (Industry Group) outperformed ASX 200 Index by ~56.51% over the last one year

Source: Refinitiv (Thomson Reuters) as on the close of 4 March 2021

Key Risks and Challenges:

Volatility in local currency may influence the import costs as majority portion of vehicles are currently being imported in Australia. The industry is highly reliant on third-party vendors in the supply chain for product quality. The recall by Takata for inflators in 100 million vehicles is the largest in world history. Government spending on charging infrastructure and supporting policies to have a direct impact on EV sales. In the recent development, voters reject the Victorian government’s tax incentives instead demanded cash incentives and supportive policies for EVs.  

Figure 7. Key Risks in The Automobile and Component Industry:

Sources: Analysis by Kalkine Group

Outlook:

Australia aims to become a net-zero carbon emission nation by 2050. There are a number of initiatives taken to support the emission goal. The federal government has increased the tax incentive threshold to $77,565 for fuel-efficient luxury cars. The government is developing a national EV strategy to increase EV penetration and to cut down costs. NSW, the most densely populated state in Australia, increased the target to purchase EV-based vehicles for the government fleet from 10% to 30%. QLD announced 13 more charging stations to be added to the Queensland Electric Superhighway. SA made it mandatory to sell only EV-based passenger cars by 2035. The $1.3 billion on Modern Manufacturing Initiatives by the government to spearhead the autonomous driving and electric vehicles transition.

II. Investment theme and stocks under discussion (AMA, ARB, GUD, PWH)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ method.

1. ASX: AMA (AMA Group Limited)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$489.73 Million)

AMA is engaged in the distribution of automotive paints and smash repair consumables, manufacturing of dynamometers and remanufacturing of transmissions.  

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 25.41% on 4 March 2021. We believe that the stock might trade at a premium as compared to its peer median EV/Sales (NTM Trading multiple) considering the strong market size of $6.0-$7.0 billion for the low and heavy severity businesses, the acquisition of Western Trucks and Perth Brake Parts businesses to support growth plans, and its geographic diversification. For the valuation purpose, we have taken peers such as GUD Holdings Ltd. (ASX: GUD), Autosports Group Ltd. (ASX: ASG), Eagers Automotive Ltd. (ASX: APE).    

2. ASX: ARB (ARB Corporation Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$2.83 Billion)

ARB sells motor vehicles accessories and light metal engineering works for four-wheel drive vehicles. It produces bull bars, rear step tow bars, turbochargers, winches, and related recovery equipment.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 15.05% on 4 March 2021. We believe that the stock might trade at a premium as compared to its peer median EV/Sales (NTM Trading multiple) considering its sizeable exports business which had provided resilient growth during the pandemic. The management is intended to grow its distribution business through store openings and the acquisition of Auto Styling Truckman Group. For the valuation purpose, we have taken peers such as GUD Holdings Ltd. (ASX: GUD), PWR Holdings Ltd. (ASX: PWR), AMA Group Ltd. (ASX: AMA). The stock delivered an annualized dividend yield of 2.03%.

3. ASX: GUD (G.U.D. Holdings Limited)

 (Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$1.16 Billion)

GUD is a manufacturer and distributor of automotive parts and pumps. It operates in Australia, New Zealand, France, and Spain through Automotive and Davey segments.

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 12.33% on 4 March 2021. We believe that the stock might trade at a discount as compared to its peer average EV/Sales (NTM Trading multiple) citing the underperforming Davey segment and the company is exposed to supply chain disruptions which are caused by geopolitical tensions and trade wars. For the valuation purpose, we have taken peers such as ARB Corp Ltd. (ASX: ARB), PWR Holdings Ltd. (ASX: PWR), AMA Group Ltd. (ASX: AMA). The stock delivered annualized dividend yield of 2.95%.

4. ASX: PWH (PWR Holdings Limited)

(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$546.98 million)

PWR holds subsidiaries involved in the design and produce vehicle cooling solutions. The group sells radiators, intercoolers, oil-coolers, and accessories to its customers globally. 

Valuation

Our illustrative valuation model suggests that stock has a potential upside of 5.86% on 4 March 2021. We believe that the stock might trade at a premium as compared to its peer median EV/Sales (NTM Trading multiple) on the back of significant revenues from emerging technologies and well-diversified businesses. Management intends to increasingly cater to the electric vehicles business which is growing at a robust pace. For the valuation purpose, we have taken peers such as GUD Holdings Ltd. (ASX: GUD), ARB Corp Ltd. (ASX: ARB), AMA Group Ltd. (ASX: AMA). The stock delivered annualized dividend yield of 1.24%.

Note: All the recommendations and the calculations are based on the closing price of 4 March 2021. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).

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Disclaimer  

 

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