Eagers: Peer Outperformance & Margin Upside

This story features EAGERS AUTOMOTIVE LIMITED. For more info SHARE ANALYSIS: APE

Eagers Automotive’s guidance for strong revenue growth in 2025 and outperformance relative to peers in 2024 is underpinning optimism.

-Eagers Automotive’s 2025 revenue guidance lifts shares
-FY24 results show cost containment and stabilising margins
-The order bank remains healthy, highlights Macquarie

By Mark Woodruff

Automotive retailer Eagers Automotive’s ((APE)) scale and diversity, both in terms of brand and location, give the dealership a unique positioning in markets across A&NZ, highlights Macquarie, with new entrants facing challenges in quickly replicating its retail and aftersales infrastructure and dealer partnerships.

With the top ten car brands controling 70% of the market, Eagers isn’t just in the mix, it’s the biggest dealer for 13 of the top 20 brands in Australia, after expanding its portfolio by 36% to 49 brands in 2024.

UBS points to Toyota and hybrid exposure, a broad OEM base, and BYD vehicle distribution as key reasons for the company’s standout performance last year.

Revolving around owning and operating motor vehicle dealerships, the core business also offers full-service facilities, including new and used vehicle sales, servicing, spare parts, and consumer finance facilitation.

Management surprised the market when releasing 2024 results, notes Ord Minnett, by providing guidance for a 9% increase in revenues, or circa $1bn (around half being organic), implying a $12.2bn total for 2025.

Driving this acceleration? A second-half 2024 acquisition adding $450m, organic expansion of the independent used car business Easyauto123 contributing $100m, and a $400m boost from the BYD retail joint venture.

Citi sees even more fuel in the tank, expecting upside to revenue guidance as Eagers eyes M&A opportunities both in Australia and offshore, teaming up with existing and new partners.

At the very least, following 2024 results, UBS feels the market has gained confidence that downside for the stock price is limited.

UBS and Citi agree short sellers scrambling for cover helped fuel a 20% rally on results day.

Despite industry-wide cost inflation and inventory challenges, UBS points out Eagers outmaneuvered the competition with its superior ability to squeeze costs and manage stock levels. The result? A pre-tax profit margin of 3.3%, a stark contrast to the 1.2% industry average.

Also materially outperforming sector peers, highlights Macquarie, Eagers’ underlying profit (PBT) of $371m proved 2.6% better than consensus forecast, though it still weakened by -14% year-on-year.

Over 2025, revenues for New Vehicles, Used Vehicles, Parts, and Service rose by respectively 16% to $7,604m, 4% to $1,728m, 13% to $1,175, and 16% to $619m.

Canaccord Genuity anticipates lower new vehicles sales in 2025 compared to 2024, partly because most brands and models have provided sufficient supply to meet their previous backlog of orders.

Overall, robust revenue growth and management commentary on stable gross margins into 2025 addressed market concerns on the resilience of margins, Jarden suggests.

Even in the face of declining industry numbers, this broker notes a number of ways Eagers can grow revenue, the most notable being increased BYD sales and the contribution from acquisitions.

Certainly, the company expects demand in the new car market to remain resilient, driven by a substantial order bank and positive industry and macro-economic dynamics.

Margins

Prior to interim results, the margin debate was divided, says Morgan Stanley, with bears arguing the pre-tax profit margin would settle at around 3% while bulls felt 4% could be maintained.

Now, the broker believes margins more than 4% are achievable in the long-term.

Positively for the margin outlook, suggests Ord Minnett, management is pointing towards a greater earnings contribution from the BYD joint venture, as well as the independent used car business (Easyauto123), plus from recent acquisitions.

Certainly, management sees “material upside to margins with ongoing execution of Next100”, the long-term plan to expand the company’s operations and market share through digital transformation, improved customer experiences, and enhanced operational efficiency.

More cautiously, Neutral-rated UBS feels a margin floor is now priced into the stock price and suggests circa 400m of PBT in 2025 still requires a flat gross margin year-on-year, which is not guaranteed.

Citing uncertainty in the new car demand environment from regulatory changes, rising competition from new entrants, and the upcoming federal election, Moelis assumes gross profit margin compression lays ahead for 2025.

Operating expenses were well contained, notes UBS, with another year of negligible like-for-like cost growth.

Corporate net debt increased by 210% on 2023, driven by investing cash flow associated with acquisitions and higher property purchases, explains Wilsons.

Moelis adds: despite increased interest costs in the second half, management was able to provide an offset via cost savings.

The total ordinary dividend based on FY24 earnings was 74 cents, fully franked, after the board declared a final 50 cent payment.

Order book

Orders written exceeded vehicle deliveries by around 10% in the second half, observes Macquarie, noting the order bank remains circa five times greater than in pre-pandemic times.

Morgans agrees the order bank remains healthy at around 2.5 months of supply, with order write continuing to outstrip deliveries by 10% through the second half of 2024.

Outlook

Should management achieve its medium-term target, Macquarie sees material upside to margins, supporting an expansion in the company’s price earnings multiple back towards pre-pandemic averages of around 18x times, with interest rate cuts providing a further tailwind.

Macquarie points out every -25bps reduction in rates provides a $6.3m per year saving for Eagers.

Given the perception of Eagers as “just a dealer” versus the structural opportunity, Morgan Stanley believes the stock can outperform consensus expectations for earnings and growth duration over the longer-term.

Scale provides multiple levers, notes Morgans, listing medium-term structural growth initiatives including consolidation; strategic industry alliances; leading the electric vehicle transition; sales channel optimisation; used vehicles; and new offshore markets.

While Jarden (Neutral) can see upside risks to its EPS forecast depending on brand-mix benefits, consumer demand and further cost optimisation, the analysts also see downside risks due to election uncertainty, new emission standards, and the sizeable Chinese OEM supply set to enter the market in the next few years.

On the back of the positive outlook for 2025 around revenue and margins, Bell Potter increases its valuation multiples and raises its target to $15.25 from $13.65. This broker has downgraded to Hold from Buy on valuation.

For the same reason, Ord Minnett also downgraded to Accumulate from Buy. Accumulate sits in between Buy and Hold on this broker’s ratings ladder.

Conversely, Citi and Macquarie have upgraded their respective ratings to Neutral and Outperform.

After this flurry of ratings changes, there are now three Buys (or equivalent) and four Holds in the FNArena database for the seven brokers monitored daily who conduct research on Eagers Automotive.

The average target price of $15.56, up from $11.96 prior to 2024 results, with the weakening share price now opening up a gap of circa -5.5%.

Outside of daily monitoring, there is one Buy rating and three Holds with an average target of $15.32.

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