Eagers Automotive Limited

Company Overview: Eagers Automotive Limited (ASX: APE) is engaged in the sales of new and used motor vehicles, distribution and sale of parts, accessories and car care products, repair and servicing of vehicles, provision of extended warranties, facilitation of finance and leasing in respect of motor vehicles, and the ownership of property and investments. The products and services supplied by the company are associated with its motor vehicle dealership operations. The company started to trade on ASX in April 1957.

APE Details 

Rising Demand for New Vehicles to Aid Future Growth: The company is focused on enhancing the pre-owned vehicle sales, which has an addressable market of ~3.9 million units per annum. During the year ended 31 December 2021 (FY21), the company experienced a rise of 14.5% in the new car market against 2020, backed by strong economic conditions and changes in consumer behaviour, mainly in response to the impacts of COVID-19, which generated strong demand for new vehicles. The company believes that it has the flexibility and capacity to invest in organic growth and pursue further acquisition opportunities consistent with its Next100 strategy that deliver accretive growth. In the short to medium term, the company is focused on enhancing EPS growth by prioritizing some initiatives, which mainly include driving operational efficiencies across all aspects of its business through delivering the Next100 strategy.

Key Takeaways from FY21: During FY21, the company experienced record results, which reflects decent market dynamics and a disciplined focus on maximising operational performance. The company recorded revenue amounting to $8,663.5 million against $8,749.7 million in FY20.

• In addition, statutory net profit after tax (including discontinued operations) amounted to $330.7 million against $156.2 million in the prior year. The company’s results have been backed by strong demand, property consolidation, greater productivity and a reduced cost base.
• The company achieved decent results in spite of the significant COVID-19 related disruption, with government-mandated lockdowns in 2HFY21.
• The company’s national, fixed price, pre-owned business easyauto123 delivered profit growth with new sites in Sydney, Townsville and across multiple locations in Auckland.
• At the end of FY21, the company had a decent financial position with available liquidity of $733.1 million (available cash and undrawn commitments) and a net corporate debt position of $128.4 million on 31 December 2021.
• APE declared a fully franked final dividend of 42.5 cps, which took the total FY21 dividend to 70.9 cps.

Financial Summary (Source: Analysis by kalkine Group)

Strategic Non-binding Agreement with EVDirect.com: As announced on 24 February 2022, the company entered into a non-binding term sheet with EVDirect.com in order to establish a new joint venture, the dealer group, as the exclusive national retailer for BYD (the electric and hybrid vehicle manufacturer).

• APE would have a 49% interest in the joint venture, and EVDirect.com has the exclusive distribution rights for BYD in Australia.
• The company believes that the dealer group will leverage its retail expertise, scale, geographic diversity, flexible property portfolio and innovative omnichannel retail solutions.

Business Segment Highlights: During FY21, the company’s performance was supported by the growth in key segments as depicted in the below picture:

Segmental Highlights (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around ~46.41% of the total shareholding, while the top 4 constitute the maximum holding. Politis (Nicholas George) and Jove Pty. Ltd. are holding a maximum stake in the company at ~27.25% and ~4.73%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During FY21, the company recorded a current ratio of 1.02x as compared to 0.94x in FY20. On the leverage side, APE recorded a debt-to-equity ratio of 2x in FY21 as compared to 2.69x in FY20.

Liquidity and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 Uncertainties: The company’s operational and financial performance could be impacted by the uncertainties led by COVID-19, which may result in supply chain and logistics disruption.
• Stiff Competition: APE operates in a very competitive environment; hence rising market share of peers could impact its operational health.
• Demand and Supply Risk: The company’s future growth could be hampered by the instability in the demand and supply.

Outlook: The company believes that it is in a decent position to capitalise on the transformation and consolidation opportunities occurring across the industry on the back of its decent financial position and record order book. Looking forward, the company would be focused on leveraging current strong market conditions, disciplined management of operations and execution of integrated technology solutions for increased efficiency, productivity and a greater customer experience. In addition, the company would consider enhancing the growth of easyauto123 business via dedicated sourcing channels, large format, factory-style reconditioning centres, as well as the launch of integrated technology solution. In short to medium term, the company would be focused on creating shareholder value by ramping up the growth of its easyauto123 business as the dominant player in the pre-owned car market in Australia and New Zealand.

Next100 Strategy (Source: Analysis by Kalkine Group)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of APE is trading below its 52-week low-high average of $11.600 - $17.665, respectively. The stock has been corrected by ~19.79% in the past six months. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average, P/E multiple, considering the COVID-19 uncertainties and other material business risks, etc. For the purpose of valuation, a few peers like Peter Warren Automotive Holdings Ltd (ASX: PWR), ARB Corp Ltd (ASX: ARB), and GUD Holdings Ltd (ASX: GUD) have been considered. Considering the expected upside in valuation, rising demand, enhancing new vehicle market, growing earnings, optimistic long-term outlook, and current trading levels, we recommend a ‘Buy’ rating on the stock at the current market price of $12.310, as on 14 March 2022, ~10:30 AM (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

APE Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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