Australia | Nov 22 2010
By Chris Shaw
Last week BA Merrill Lynch reinstated coverage on Automotive Holdings ((AHE)) with a Buy rating. The resumption of coverage follows an absence of more than a year and reflects the broker's view scale in a fragmented market and an improving sector outlook suggests value is on offer at current share price levels.
In its report BA-ML noted Automotive Holdings, which is Australia's largest listed owner and operator of car dealerships in Australia, has a number of positives related to its significant exposure to the Western Australian economy.
Automotive Holdings generates about 50% of its revenue from WA and BA-ML views this as a positive given that state's resources activity means employment is buoyant. This is important as employment is a key driver of consumer sentiment, which supports new and used car sales.
The other big positive for Automotive Holdings, in the view of BA-ML, is the company's national leader position in the auto sector, which remains a very fragmented market. Given this scale there is potential to lift margins going forward, while BA-ML notes there is also the financial headroom for further acquisitions to be considered.
In its note BA-ML forecast relatively flat earnings in FY11 before growth resumed in FY12. Its forecasts in earnings per share (EPS) terms were for 24.4c this year against 24.3c in FY10, rising to 25.2c in FY12.
Confidence in these forecasts has increased following an earnings update at the annual general meeting of Automotive Holdings, held last Friday. At the AGM management indicated EBITDA (earnings before interest, tax, depreciation and amortisation) for the first four months of FY11 was $35.7 million, which puts the company on track to meet the BA-ML forecast for the full year of $107 million.
In net profit after tax terms this implies an increase of 4.6% for the four months, which means earnings are tracking slightly ahead of BA-ML's numbers. Along with the benefits being derived from a strong WA economy, the update also indicated the Logistics operations of Automotive Holdings were running ahead of expectations for the year so far.
While not changing its forecasts on the news, the update suggests there is some upside risk to the earnings estimates of BA-ML. UBS has also not changed its earnings forecasts on the back of the trading update, the broker agreeing with BA-ML there is a positive outlook for Automotive Holdings.
As UBS notes, above market growth expectations are reasonable given Automotive Holdings is currently developing the 43,000 square metre Castlehill site, while integration of the Ferntree Gully Toyota facility is also continuing.
Like BA-ML, UBS sees scope for acquisitions to add value to Automotive Holdings going forward, with Victoria and New South Wales seen as likely markets for such moves. A number of opportunities are currently being evaluated by management, UBS noting strong free cash flows will make it easier for such acquisitions to be made.
UBS is a little more aggressive than BA-ML with its EPS forecasts, anticipating results of 25c this year and 29c in FY12. This puts UBS above market consensus with respect to its EPS estimates, the FNArena database showing consensus numbers of 24.7c and 27.4c respectively (BA-ML thus sits below consensus).
UBS has a price target on Automotive Holdings of $3.10, which is well above the BA-ML target of $2.52. The consensus price target according to the FNArena database is $2.82, with both RBS Australia and Macquarie setting their targets close to this level. Both stockbrokers have not yet updated their views post Friday's AGM. Overall, the database shows Automotive Holdings is rated as Buy by all four brokers to cover the stock.
Shares in Automotive Holdings today are stronger and as at 12.00pm the stock was up 8c at $2.33. This compares to a range over the past year of $2.10 to $2.88 and implies upside of more than 22% to the consensus price target according to the FNArena database.
