Will ASX Automotive Stocks Hit Top Gear In 2021? 

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This year's economic recovery has breathed new life in the local automotive industry, but not all share prices have been treated equally

-New car sales are back on the rise in Australia, but structural challenges remain for the industry
-History shows a close correlation with consumer confidence and a buoyant property market
-Post-covid world poses many questions, with far less answers

By Nikhil Gangaram

The Australian automotive industry has changed dramatically over the past 10 to 20 years. The impact of the internet, the emergence of electric vehicles and the demise of GM Holden highlight the cyclical nature of the sector.

In recent years, decreasing consumer confidence, lower levels of household wealth, waning unemployment and regulatory changes have dogged the industry. Prior to November 2020, the automotive industry had reported 31 months in a row of sales decline. The sector was on its knees when General Motors announced that it would cease production of the Holden brand.

Despite the doom and gloom professed by many pundits, recent data have shown there is more fight left in the industry. Earlier this month, the Federal Chamber of Automotive Industries (FCAI), released new vehicle sales figures for February 2021. The FCAI reported that a total of 83,977 vehicles were sold in February 2021. The positive result was 5.1% higher than the prior corresponding period when 79,940 vehicles were sold.

Renewed life in the industry has been reflected in the share price of Eagers Automotive ((APE)) but a lot less so for Carsales ((CAR)). Irrespective, investors are divided on the medium and long term outlook for the automotive sector.

On one side, some argue that the rise of the ‘sharing economy’ spells the demise of new car sales as consumers look to get more creative with their dollar. On the other hand, some pundits are adamant that ‘everything is cyclical’ and that the automotive sector is poised for renewed growth over a significant period of time.

Regardless, Australian investors are eager for the sector to stop stalling and address the realities of a changing economy.

Hitting top gear

There are many tailwinds that could help the ASX automotive sector hit top gear. Firstly, a changing attitude to public transport could see a surge in demand for new vehicles. In the short term, social distancing measures and personal preferences have pushed consumers to avoid public transport and drive to work instead. Limited vehicle supply and a surge in pent up demand could be fantastic for car dealerships.

In addition, sustained international border closures could see demand for air travel trickle to the automotive sector. Instead of flying interstate or overseas, consumers may opt for the humble road trip as their next holiday.

Increasing consumer confidence and the wealth effect could also play a role in the automotive sector hitting top gear. Historically, new car sales have been strongly correlated with consumer confidence and wealth measures such as house prices. Late last month, the Australian property market reported its best week since 2018, with national auction clearance rates in excess of 84%. With more consumers feeling richer and spending more, it bodes well for the automotive sector and the economy as a whole.

There is also a clear shift in the way new and used cars are being bought and sold. As a result, car dealers are also looking to extend their hand, by radicalizing how customers purchase vehicles. For example, automotive conglomerate Eagers plans to construct a mega-complex near Brisbane airport in order to tap into the "experience economy". The facility is expected to host a test track and two dozen showrooms. In addition, Eagers also plans on expanding new-car showrooms to shopping malls from the end of this year.

The recovery in the Australian automotive industry is not only limited to dealerships. A host of other auxiliary companies could also see flow-on effects. For example, with more Australians taking road trips for their holidays, expect more visits to auto shops.

Listed companies like Bapcor ((BAP)), which owns the Autobarn chains, and Super Retail Group ((SUL)) which operates Super Cheap Auto could see greater demand. In addition, the likes of GUD Holdings ((GUD)) and ARB Corp ((ARB)), which specialise in off-road accessories, could also be poised to benefit.

Speedbumps

Despite the positive highlights, the Australian automotive sector is by no means enjoying a smooth ride.  Since the shutdown of Australian-made vehicles in late 2017, the automotive industry has had to fight many battles.

Given the cyclical nature of the industry, the big question is how long could a recovery last?  

The cyclical nature of the industry threatens to curb long-term optimism. The sudden surge in new car sales could be explained by consumers making one-off purchases with their newfound savings. For example, many cashed-up consumers could be more prone to splurging their holiday money on purchasing a new car. So long-term sustainability and recovery in the automotive industry comes under question.  

Given the discretionary nature of cars, consumer behaviour will rely on more pertinent economic factors such as Australia’s economic growth, house prices and the medium-term unemployment rate.

In addition, many are predicting the shift to working from home as a result of covid will continue after the virus has been contained and that this will lead to a decline in long term automotive demand. The emergence of the sharing economy, particularly in cities, is another curve ball that the industry will have to deal with.

Although the push to more green alternatives is also becoming a worldwide theme, Australia is lagging far behind global consensus. A survey from global auditing and accountancy firm Deloitte showed Australian consumers have little desire to go electric. Out of more than 1000 local buyers surveyed, only 4% said that they would be looking for a fully-electric vehicle as their next purchase.

This is compounded by the fact government legislation continues to trifle with emission standards. Currently, NSW is the only state that has proposed stricter regulations around noxious emissions and CO2 standards for vehicles sold within the state.

In a recent update on the industry domestically, analysts at UBS highlighted EV sales now represent 0.7% of total sales in Australia, but the numbers are growing by 138% from last year.

The jury is still out on what the Australian automotive industry will look like in the long term. One thing is for sure though, the sector still has plenty of drive and the gears are changing fast.

The Verdict In April

The above mentioned analysts at UBS have kept their Buy ratings for both AP Eagers and Autosports Group ((ASG)), the latter remains in favour due to long term leverage to the luxury cars segment of the market.

FNArena's Stock Analysis shows most brokers remain on par with UBS, though only one price target -Morgan Stanley's $17- is still above the rising share price. Autosports Group is only covered by two of the database brokers and both still hold a positive view, with both price targets below the current share price.

Carsales, on the other hand, counts more Hold/Neutral ratings than Buys, but its share price is currently trading well below consensus target of $22.12. Bapcor shares are equally below consensus target, but at least broker ratings are all positive, with the sole exception of Morgans' Hold rating.

Super Retail, which represents a lot more than just Super Cheap Auto, is seen trading some -10% below consensus target, and only two brokers don't think that deserves a Buy (or equivalent rating).

Broker opinion on ARB Corp is a bit more circumspect; one Accumulate, two Holds and only one Buy, but all price targets remain above the share price, despite that share price more than doubling from mid last year.

One of the cheapest stocks in the sector is that of AMA Group ((AMA)), distributor of parts and provider of repair services, whose shareholders have experienced an annus horribilis as the business encountered a tsunami of disappointing developments.

Some of the lesser known names in the sector include PWR Holdings ((PWH)), Motorcycle Holdings ((MTO)), Maxitrans Industries ((MXI)), Apollo Tourism & Leisure ((ATL)), Vmoto ((VMT)) and Supply Network ((SNL)).

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