Automotive Holdings Group Limited

Proposed Merger With A.P. Eagers Limited To Realise The Synergies: A.P. Eagers Limited (ASX: APE) has announced that the number of ordinary shares in Automotive Holdings Group Limited (ASX: AHG) in which it has an interest, as a percentage of AHG shares on issue, has now increased to 51.35%.

Since AP Eagers’ offer opened on 23 April 2019, acceptance instructions for 22.5% of AHG shares on issue have been deposited with the Acceptance Facility.The shareholders depositing the acceptance instructions into the Acceptance Facility at this early stage sends a strong signal to the Board of AHG about their support for the merger of the two businesses.

The management of A.P. Eagers considers that reaching beyond 50.1% early in the offer period reflects the confidence in proposed merger.It also signals a trust among those shareholders who deposited acceptance instructions with the Acceptance Facility that both companies will be stronger together under proven management expertise as well as a track record of profitable growth. With the acceptance of the offer by the AHG shareholders, the full benefits of the merger, particularly the synergies could be realised.

Financial Performance in 1H FY19: AHG posted operating NPAT for 1H FY19 at $24.2 million. The statutory loss stood at $225.6 million (mainly because of unusual items and a non?cash impairment to the carrying value of its Automotive and Refrigerated Logistics businesses).

As on 31 December 2018, net debt position (excluding floorplan) on the balance sheet was $284.7 million. Significant working capital movements impacted net debt for both reporting periods. On a normalised basis, debt amounting to ~$35 million was paid for 1H FY19. The businesses have been negatively impacted by regulatory changes affecting company’s traditional strength in finance and insurance sales along with exposure to lower?growth brands and locations.


1H FY 2019 Financial Highlights (Source: Company Reports)

Management’s Outlook: As a downtrend has been witnessed in the Automotive market, AHG suggests its forecast for FY19 Operating NPAT range at $52 million-$56 million as compared to earlier guidance of $56 million-$59 million.

The Refrigerated Logistics (RL) division is witnessing better performance after the recent transformation program with strong business development in the pipeline. Theperformance in the second half in RL is likely to be a significant improvement (pcp basis) which in turn will add to the Group earnings momentum.

The company has a near?term target to reduce the recurring cost of $23 million for FY2020.

Stock Recommendation: At the current market price of $2.490 per share, the annual dividend yield for the stock comes in at 6.82% with market capitalisation at ~$792.58 million. The stock has risen substantially in short-term with gains of 52.72% and 35.41% in last 3-months and 1-month, respectively.

Hence, considering the proposed merger to result in as synergy for both the parties with the deemed outlook for the automotive sector, intact fundamentals and significant return witnessed in the short run, we give a “Hold” rating on the stock at the current market price of $2.490 per share (up 4.184% on 2 May 2019).  

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