Peter Warren Automotive Holdings Limited

Company Overview: Peter Warren Automotive Holdings Limited (ASX: PWR) is an Automotive dealer company operational in, Northern New South Wales, Sydney and Southern Queensland. It provides variety in old and new vehicles through vehicle brands and franchises.

PWR Details

Growth Underpinned by Increase in Demands Along with Prudent Product Mix: The company holds a network of 28 automotive manufacturers, 18 locations in Australia and 74 franchise operations across the product mix including, luxury, prestige, and volume segments.

Look at FY21 Performance:

Despite COVID-19, the company reported resilient performance during the year, owing to the rise in demands.

• As compared to the pre-Covid-19 and FY19 levels, the company recorded a decent growth of ~11.1% in its new vehicles segment sales, which led to an increase of ~18% in its total revenue from operations and reported as $1,612.25 million. The performance is mainly driven by the product mix of luxury, prestige, and volume segments.
• Despite the fall of ~2.8% (2 years CAGR) in national market demand, its New Vehicle unit growth increased in FY21 (mainly in the second half) by ~0.6% (2 years CAGR) from FY19.
• Its proforma EBITDA showed a ~42% hike to $108 million (Actual) from $76 million (Forecast).
• PWR showed efficient execution and strong operating leverage by reporting a ~321.5% increase in its net profits of $37.55 million in FY21 versus $8.91 million in FY20.
• It closed its accounts for FY21 with no corporate debt and the cash and cash equivalents as of 31st June 2021 at $42.92 million, compared to $74.69 million in FY20.

Growth Drivers and Catalysts:  

• With a CAGR of ~2.0% in Australian Vehicle Car Registered, on average ~1 million cars are sold in Australia. PWR expects its proforma NPBT to be in the ambit of ~$32-~$34 million for 1HFY22.
• The business model is also dependent on the successful relations maintained with Original Equipment Manufacturers (OEM) and their retention.
• Focus on cost reduction through digitalisation and operational efficiency resulted in ~18% of operating leverage and operating cost margin of ~11.4% in FY21.
• Supply chains, including new car availability and spare part inventories, also affect business efficiency and growth.

Revenue Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 69.42% of the total shareholding, while the top 3 constitute the maximum holding. Warren (Paul) and Quadrant Private Equity Pty Limited are holding a maximum stake in the company at ~34.02% and ~9.13%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company has reported an improvement in gross margin performance from FY19 at 16.2% to 18.7% in FY21. Net margin also improved to 2.3% in FY21, compared to 0.6% in the prior year.

Liquidity Profile & Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks & Mitigation: The company is exposed to the following risk factors and their mitigations are as follows:

   A. COVID-19 and Omicron Variant Risks:

• Due to COVID-19 and the new variant, PWR is prone to impact its sales. But during FY21, it tried mitigating the same by "New Vehicle Order Bank" at 30th June 2021, which supported the vehicle delivery in 1QFY22.
• To mitigate the risks, the company is following proactive steps like going digital and adapting "Click and Collect".

   B. Changes In Consumer Demand: The demand for its products might get impacted by changes in consumer & client preferences, where its Product Mix comes into play for its Mitigation to some extent.

   C. Foreign Currency Risk: The company is also exposed to fluctuations in foreign currency, which might impact the profitability.

Outlook: The company has delivered improved performance in vehicles sales in FY21, and further, it plans to focus on ownership and long-term leases for its Properties' Portfolio. Besides, for its organic growth, it is strategizing on reduction in cost by inducing digitalisation and enhancing operating efficiencies. In the coming years, the company expects synergies related to strategic rationale, location and value from its acquisition of Warwick Farm, Southport Properties, Tweed Mazda, Collins Honda, Northern Rivers Honda, and Patriot Campers. With the positive outlook, it expects an improvement of 75-80% in the calendar year 2021's performance in the range of ~$80.8- $82.8 million.

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: As per ASX, the stock of PWR is trading below its 52-weeks’ average levels of $2.77-$3.85. The stock of PWR gave a negative return of ~23.71% in the past six months and a negative return of ~14.63% in the past three months. The stock has been valued using 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 some discount to its peers’ average multiple, considering the expected supply chain disruption due to COVID-19 and cost efficiencies due to synergies created after acquisition. For the purpose of valuation, few peers like Eagers Automotive Ltd (ASX: APE), Bapcor Ltd (ASX: BAP), Autosports Group Ltd (ASX: ASG) and MotorCycle Holdings Ltd (ASX: MTO) have been considered. Considering the expected upside in valuation & current trading levels, improvement in NPAT, reduction in net debt, prudent cost approach, optimistic long-term outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $2.80, (as on 7^th December 2021).

PWR 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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