Small Caps | Nov 28 2023
This story features AUTOSPORTS GROUP LIMITED. For more info SHARE ANALYSIS: ASG
Despite higher interest rates, Autosports Group is seeing no easing in demand for luxury cars, providing solid revenue growth guidance at its AGM.
-No let-up in Autosports’ luxury/prestige demand
-Solid revenue growth guidance
-Margins slip on higher interest cost
-Significant M&A potential
By Greg Peel
Autosports Group ((ASG)) engages in the motor vehicle retailing business in Australia, selling new and used motor vehicles, aftermarket products and spare parts, as well as distributing finance and insurance products and providing motor vehicle servicing and collision repair services – the latter known as its “back-end” business.
As a car dealer Autosports has a leaning towards high-end brands. As well as selling VWs, Kias and Subarus, we then step up to Audi, BMW and Mercedes, and then on to Jaguar, Aston Martin, Bentley and Rolls Royce, along with Lamborghini, Maserati and McLaren.
I’ll take one of each. And that’s not even all of them.
Some of us can only dream, but the luxury car market is alive and well in 2023, with “Super Luxury” seeing strong double-digit growth over July-October.
Autosports provided guidance at its AGM for first half revenue growth of 23-25% year on year and profit before tax of $50-52m. UBS believes the revenue growth range looks modestly conservative given some 12% year on year growth in July-October from M&A and new car volumes from key carmakers such as Audi, BMW, Volkswagen, Jaguar Land Rover and the Super Luxury segments
Any incremental revenue versus guidance should see strong profit drop-through, the broker notes.
Positive commentary provided by management at the AGM included resilient prestige/luxury demand with no signs of a slowdown in FY24 to date, expectations for consistent vehicle supply through the second half and continued growth in high-margin back-end revenue due to increased service plan penetration.
The bad news is interest costs have risen to $20m in the first half, up from $4.7m a year ago due to increased inventory, higher interest rates and increased debt from the Fortitude Valley property purchase and the two acquisitions in the previous year.
Guidance to $50-52m profit before tax represents an increase of only 0.5% at the midpoint, Moelis notes.
The market was likely disappointed, UBS suggests, in a moderation in implied profit margins to 4.0% from 4.7% in the second half FY23, a mild reduction in the order bank and increased vehicle inventory. The stock is since down -6%, although Monday saw a generally weak session. The implied -70bps half-on-half reduction in margin is primarily driven by interest expense (-40bps), UBS notes.
Assuming a consistent half-on-half organic operating expense growth rate in the first half, year on year, implies gross margins are relatively consistent, the broker suggests.
Despite this solid outcome, UBS believes potential margin normalisation remains the most material market concern around listed auto dealers, and despite being already factored into consensus, likely remains a near-term valuation headwind. In the broker’s view, executing on the targeted acquisition pipeline presents meaningful earnings upside and buffers potential margin normalisation.
Another key point UBS finds worth highlighting when comparing Autosports’ margin profile now versus history is the increased quality of the manufacturer mix today. Pre-2018, the company had significant over-exposure to Audi and VW and less than half the Super Luxury share. BMW is now the largest manufacturer represented and Super Luxury has grown to 11% of sales.
This underpins management's confidence in longer-term margins.
Given a still sizable order bank, Moelis expects this will provide some level of support for new car gross profit margins. The broker expect margins will eventually return to historic levels as the order bank unwinds, however, higher new car supply results in higher wholesale used car volumes, which therefore impacts margin mix.
Moelis believes acquisition potential remains significant, with Autosports guiding to a target of some $250m in revenue per annum from acquisitions. Industry feedback suggests there are a large number of potential acquisitions available for sale on the market. While Moelis sees Autosports as a natural consolidator, this broker expects the company will remain disciplined around pricing.
Moelis has left its FY24 estimates unchanged while minor downgrades of -4-5% in FY25-26 reflect higher interest costs. Trading at 5.5x forecast FY25 PE (excluding property), the broker suggests Autosports remains attractive, retaining a Buy rating with a $3.20 target.
Despite further cost pressures from rising rates, Citi remains positive on the outlook for the second half, noting continued growth in high-margin back-end revenues and the company still seeing growing customer order-write with only a mild reduction in its order bank.
Citi has a Buy rating and $3.45 target.
UBS’s operating profit forecasts are largely unchanged with revenue upgraded slightly over the medium term. Increased interest expense due to higher interest rates nevertheless sees earnings forecasts trimmed -3% and -1% across FY24-25.
UBS has dropped its target to $3.10 from $3.20, retaining Buy.
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