Autosports Cruising Comfortably

This story features AUTOSPORTS GROUP LIMITED. For more info SHARE ANALYSIS: ASG

The market for luxury cars appears untainted by the pandemic as Autosports Group posts robust net profit and margins in FY21

-Strong margins expected to continue into FY22 before normalising in FY23
-Shift to servicing vehicles purchased in FY21 should provide an offset
-Autosports targeting acquisitions, property consolidation

By Eva Brocklehurst

Prestige car dealership Autosports Group ((ASG)) has benefited from a demand-led recovery in FY21 amid contributions from acquisitions. Margin improvement occurred in all business lines and pre-tax profit was up 225% to $75.2m.

Going forward there is a strong book of confirmed sales which have countered the lockdowns in NSW and Victoria, and gross profit per vehicle is still growing. The current lockdowns have meant 27 showrooms are closed to customers, and 75% of revenue comes from these two states.

Vehicle sales, service parts and panel repairs are open on a contactless basis to mitigate the impact. As a result of the current lockdowns, no FY22 guidance was provided.

Previous experience tells Macquarie to expect a strong retail bounce post the lockdowns in NSW and Victoria and there are some mitigating factors, with the August order book larger than May and deliveries being completed at elevated margins.

The company expects strong margins as supply remains tight throughout FY22, believing 17.5% (gross profit margin in H2) is sustainable. The order intake for super luxury vehicles is healthy yet other segments have likely slowed in Sydney and Melbourne, Moelis points out, although when restrictions ease the order book should be replenished quickly.

The company concedes margins on new car sales will normalise during FY22-23 yet believes the shift in mix will be towards the back end (service), which will provide an offset.

Higher margins are being driven by favourable vehicle supply/demand dynamics, Wilsons concurs, anticipating these conditions will remain in place throughout FY22. The broker understands recent enquiries suggest even stronger underlying demand.

Portfolio optimisation will benefit earnings through FY22-23, and FY23 is unlikely to be affected by lockdowns. Management believes the environment is conducive to further industry consolidation and is also buying back strategic property, the latest being the Bundoora BMW site, set to save $1.6m per annum in rent for a consideration of $18.4m, funded through debt and cash reserves.

Service income is down -20-25% in affected regions and a large portion of this is offset by staff reductions via rostering. The company has consolidated three properties in Brisbane and Melbourne which will save on lease expenses and intends to acquire other properties in strategic locations.

Risks

Jarden notes the supply chain constraints are mirroring listed peers and consequently gross profit margins remain high going into 2022. Deliveries appear to be delayed so September is likely to be a subdued month.

The main risk the broker envisages reflects the cyclical nature of the industry. Autosports is therefore exposed to changes in consumer sentiment as well as macro factors that constrain discretionary expenditure. Changes in OEM (original equipment manufacturer) relationships can also lead to a reduction in earnings.

UBS welcomes the turnaround in FY21, noting revenue growth of 25% was driven by new vehicles, up 34.7% in the second half. OEM rebates amounted to $56.4m, up 5.2%.

Autosports is targeting a return to a gross profit margin split of 55:45 for the front book (vehicle sales, finance, aftermarket) versus the back book (service and parts). Macquarie explains demand for services will increase as the new vehicles that were sold in FY21 return to the workshop for warranty service work in FY22. This will occur along with service that was delayed during the lockdowns.

Macquarie upgrades to Outperform with a $2.70 target, believing the recent de-rating of the stock has increased the valuation appeal. All other brokers mentioned have Overweight or Buy ratings with targets ranging from $3.00 (Moelis, UBS) to $3.33 (Wilsons).

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