Amotiv’s Potential Going Unnoticed

This story features AMOTIV LIMITED. For more info SHARE ANALYSIS: AOV

The future looks much brighter for vehicle parts business Amotiv, but the market is not paying attention.

-Green shoots appearing for Amotiv
-Balance sheet much stronger
-Expansion in products and geographies
-Market undervaluing the stock

By Greg Peel

Back in 2020, GUD Holdings set a five-year strategy that included reducing customer concentration and internal combustion engine (ICE) exposures.

Those 2020 targets were met ahead of schedule, Canaccord Genuity noted in early August, and while the broker expects a new strategic blueprint for the next five years will be forthcoming, the change in segment reporting in Canaccord’s view marks the completion of GUD 2025 and the first phase of evolution for this business.

Canaccord continues to believe the market broadly under-appreciates the improvement in the business and the foundation which management has built to move the company into its next phase of evolution and growth. In line with its “new phase”, GUD changed its name to Amotiv ((AOV)).

One could say Amotiv is a one-stop shop for every part or accessory available for 4WDs, utes and caravans/campervans, from ute canopies and trays, to towing equipment, trailer/caravan parts, drive train systems, brakes, lighting options, batteries and general camping equipment. Except that Amotiv distributes its products through over forty different brands across Australia and New Zealand.

GUD/Amotiv’s share price has struggled to gain any traction over the past year, still suffering from a long hangover following covid era supply chain constraints, particularly in delivering new vehicles ready to be tricked up with the company’s vast array of whiz-bang accessories.

At least, that’s the way the market has seen it.

Back in early 2022, GUD forked out $745m to acquire towing/trailer parts business AutoPacific Group (APG) but that acquisition has to date failed to fire. In an earlier misstep, GUD acquired water pump business Davey, before selling out again last year following underperformance. Clearly, market confidence has been dented.

Brokers, however, see it differently, believing Amotiv’s much-improved trajectory is going unnoticed.

Green Shoots

The highlight of (what was then) GUD’s otherwise in-line FY24 result (the name-change came in July) was stronger than expected cash flow, which resulted in the company’s gearing rate falling from 2.6x in the first half of FY23 to 1.6x, at the bottom of management’s target range.

What was clear was that while Australia is on the mend, New Zealand continues to drag. Strong new vehicle growth in Australia drove operating leverage and margin expansion for APG, but volumes were down across the Tasman.

The resilience of margins was also a highlight. Citi notes Amotiv has locked in a freight contract that sees container rates fixed through to July 2025. The company’s currency exposure is 80% hedged. And Citi expects price rises in early 2025 to cover inflationary pressures.

Citi believes margins may step up further in the second half from the first given Amotiv is pursuing cost reductions in New Zealand which will take time to flow through.

Despite lingering NZ softness continuing to slow the APG recovery, Amotiv has guided to FY25 growth off the back of stabilising new vehicle sales and a resilient wear & repair market.

Citi further points out Amotiv is transforming itself from a relatively mature business (founded in 1915, listed for over 60 years) to one with several growth opportunities including geographical expansion, first into South Africa, which is expected to generate revenue in FY25, and through Rindab, which provides Amotiv with an opportunity to leverage distribution and customer relationships to sell its broader range of lighting and power products in Europe.

Citi sees further geographical expansion as logical, for example into South America, over the medium term.

Amotiv also continues to increase its product development spend which should be positive, Citi suggests, given, if executed effectively, the company should have increased intellectual property and less exposure to commoditised products, which is relatively more at risk of private label competition.

Amotiv’s FY24 result appeared to alleviate some investor concerns, Goldman Sachs suggests, with green shoots coming through via contract wins, product development and geographical expansion amid what continues to be a challenging environment.

Medium Term Play

Goldman Sachs sees key earnings upside to come from improving stability in vehicle supply into 2025 with potential for further bolt-on acquisitions to drive product and geographical expansion.

UBS is supportive of the continued rise in product development spend and greenfield investment (the latter has yet to deliver material benefits) as the broker expects it will support longer term organic growth both domestically and offshore. The balance sheet also now provides much greater optionality around M&A and capital allocation.

Wilsons observes a favourable outlook for the business, driven by growing car volumes and the structural shift towards 4WDs and SUVs. The investment thesis is further complemented, the broker suggests, by Amotiv’s effective margin management, investment in growth initiatives that will deliver incremental earnings through FY25 and more so into FY26, the prospect of material cyclical upside in earnings from the existing business, and the transparency and discipline of introducing a capital allocation framework.

Morgans considers Amotiv to be a high-quality business, with an entrenched market position across core categories and a clear runway for growth. This broker is attracted to the investment case, with a resilient earnings base, supportive short-term catalysts (ongoing car supply normalisation), long-term growth supported by structural industry tailwinds, and ongoing accretive M&A optionality.

Amotiv is building a stronger, more resilient and diversified business, Macquarie believes, with increased product development spend and geographic expansion helping underpin future growth.

Too Cheap

In Canaccord Genuity’s view, Amotiv shares are trading too cheaply for the position of its businesses within respective markets and the near and medium-term prospects for the group overall.

This broker believes that over the next twelve months investors will likely progressively re-rate the company as investors worry less about APG’s prospects (as further earnings growth comes through) and the broader business continues expansion and broadly maintains its current operating margins.

Citi thinks the market is still yet to fully appreciate the materially better position the company is in today compared to two years ago, noting the stock is trading on a 14x one-year forward PE only marginally higher than 12x two years ago.

In this broker’s view, the company is better off today given the balance sheet has gone from a position of weakness to strength, there are more international growth opportunities, the underperforming Davey business has been divested, and 75% of revenue is from non-ICE, up from 69%.

Citi’s 14x forward PE is based on the broker’s own forecasts. Both UBS and Morgans have the stock still trading at a 12x FY25 PE. UBS puts fair value closer to 15x on its sum-of-the-parts valuation, but does expect the pace of a potential multiple re-rate to be gradual through FY25 given the modest second half skew and stronger earnings growth emerging in FY26.

There are four brokers monitored daily by FNArena covering Amotiv, and all have Buy or equivalent ratings. Their price target range is relatively tight, averaging to $13.15, suggesting 25% upside.

Wilsons, Goldman Sachs and Canaccord Genuity also all have Buy or equivalent ratings. Wilsons has a low-end target of $12.69, Goldman has $13.00, while Canaccord stands out with $14.40.

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