Australia | Aug 18 2014
-FY15 critical for logistics strategy
-Vehicle sales outlook still subdued
-Capacity for further acquisitions
By Eva Brocklehurst
Automotive Holdings ((AHE)) defied fears regarding the new car sales environment, posting an underlying increase in automotive sector earnings in FY14, albeit modest. Revenue from acquisitions is expected to drive the FY15 growth outlook. In contrast to to the automotive franchise, refrigerated transport was affected by one-off costs and adverse weather.
FNArena's database has five Buy ratings and two Hold. Brokers with Buy ratings consider the stock's valuation undemanding. The two with a more circumspect outlook, JP Morgan and Credit Suisse, remain concerned about the composition of FY15 growth. The consensus target is $4.25, which suggests 12.1% upside to the last share price. Targets range from $3.72 to $4.70. Dividend yield on FY15 and FY16 forecasts is 6.0% and 6.5% respectively.
To UBS, the company excels at selling cars but earnings from logistics need to improve to justify the investment. The broker considers FY15 will be a critical year for demonstrating the company's logistics strategy is on track for a positive return on capital. The current share price does not imply any strategic benefit from the recent acquisitions so UBS considers this supportive of a Buy rating. Weakness in logistics has persisted for the past three years Deutsche Bank observes. A pattern of weak second half performances in refrigerated logistics points to a problem of seasonality and lack of scale. The recent acquisition of Scott's Refrigerated Freightways was partly aimed at addressing these problems but the benefit will not be apparent for some time, in the broker's view.
CIMB is concerned that almost all FY15 growth assumptions come from recent acquisitions, and acquisitions are likely to be provide the upside in the future, given the fragmented nature of the industry. Optimistic forecasts for the Scott's and the Bradstreet Motor acquisitions are offset by much more conservative growth forecasts for the underlying business. On CIMB's numbers, taking out the two most recent acquisitions, 1% year-on year underlying growth is all that can be expected. This may prove conservative, if transport and cold storage pick up. The broker retains an Add rating on the basis that valuation is not stretched.
JP Morgan settles for Neutral. The broker considers there is significant execution risk in refrigerated logistics and this could be drag on near-term earnings. Moreover, consumer confidence may weigh on the outlook. Recent monthly vehicle sales have not impressed and Western Australia, which represents around a third of the company's dealer network, has been particularly soft. Setting aside these disappointments, a fully franked final dividend of 12.5c was marginally ahead of JP Morgan's forecasts and brings the full year pay-out to 80%.
Subdued consumer confidence and falling disposable income is a drag on the outlook, although Credit Suisse observes this is being mitigated by some annualisation of acquisitions. Refrigerated logistics should improve in FY15 and the acquisitions support total revenue growth. Credit Suisse suspects the logistics weakness may be more structural than cyclical. The decline in earnings in this area was the biggest disappointment for the broker, having forecast an improved second half result. To improve this state of affairs Scott's should bring greater geographic spread and scale.
In automotive, low financing costs, strong vehicle affordability and continued vehicle discounting will underpin new vehicle sales. Also, the industry supports continued consolidation. Manufacturers may be unwilling to allow larger groups to consolidate but the broker believes, if the Australian market experiences an extended period of decline in the profitability of dealerships, they will become more attuned to a further concentration of dealer brands.
Helping to offset a weaker FY15 like-for-like performance is an increased focus on the contribution from finance and insurance market penetration, and a stronger parts and services book. Credit Suisse believes the company's size means significant scale benefits for the dealer operations, while margins that are above the industry average can offset weakness in volume. Total net debt may appear high but, when adjusted for dealer floor plans, interest coverage is strong. Macquarie takes comfort in this aspect, noting this is the way banks view the stock. As a consequence, the broker considers the company has capacity for $100m in acquisitions and expansion.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
