- MTO's FY17 result slightly beat our forecasts with 12% revenue growth and 16% NPAT growth. MTO’s new bike sales materially outperformed the broader industry.
- The impact of likely future regulatory change in the provision of insurance products in dealerships is already flowing through and will curtail FY18 EBITDA by cA$2m (completely offset by recent acquisitions, based on our forecasts).
- Yesterday's disclosure does not change our bigger picture view that MTO is well placed to consolidate a highly fragmented industry - this is where the earnings growth and therefore valuation upside lies. Positive outlook commentary relating to the acquisition pipeline (dealerships/accessories) leaves us confident this management team will continue to deliver.
- Add rating
FY17 result – NPAT +16% (all organic)
FY17 was a strong year for MTO with 12% revenue growth converting to 16% NPAT
growth. The GM increased by 50bp on the pcp (+20bp/+70bp 1H/2H) while the EBITDA
margin increased by just 8bp to 6.2% (curtailed by a A$200k drag from recent
acquisitions) or 6.5% excluding the acquisition impact.
New motorcycle volumes
increased by 22%, well in excess of national industry road bike sales which were down
3% over the same period. All other businesses (Accessories, Service/Parts, Commission
and Used) reported solid revenue growth and GM expansion.
The company declared a
final dividend of 7.5cps, above our 7.1cps forecast, reflecting a slightly higher than
expected payout ratio of c61.2%.
Insurance changes to curtail FY18 growth...
MTO quantified the expected earnings impact ahead of regulatory changes to the
provision of Insurance products in dealerships. MTO expects a A$1.4m NPAT impact
(A$2m at EBITDA) in FY18.
We note that the company has not assumed any offsets in
this guidance (like higher penetration rates given more favourable premiums etc) and
therefore this may prove to be conservative.
MTO noted that the earnings impact from
these insurance changes will be "largely offset by the expected full year NPAT
contribution from acquisitions completed late in FY17".
Based on our estimates, the
acquisitions will entirely offset the insurance drag in FY18.
But it's all about acquisitions...and the industry is ripe for this
MTO noted its acquisition pipeline remains "active", referring to both further dealership
acquisitions and the right to distribute new motorcycles. MTO also noted that it has plans
to grow within Parts & Accessories.
More specifically, the company highlighted
opportunities to grow via importing accessories to retail via its own store network and
wholesale to other dealers. Clearly either of these opportunities would carry a more
attractive margin (wholesale and retail margin).
Whether MTO grows into this channel
via acquisition or organically (we note the company has already started importing
helmets from Europe) remains to be seen, although the company noted "opportunities to
grow earnings in Finance and Accessories are being explored".
Add maintained with increased price target
We have incorporated the expected Insurance impact from FY18 which sees our EPS
forecasts fall by -7.8%/-7.4%/-7.4% in FY18/FY19/FY20. A roll-forward of our valuation
and increased CF assumptions (less working capital intensity) sees our blendedDCF/PE valuation increase – access to Morgans clients only.
We do not
forecast future acquisitions, despite this representing MTO's largest future growth driver.
We therefore are comfortable with the group trading above its peers in the short term
until these opportunities come to light.
The key downside risks include: deterioration in
general economic conditions and discretionary spending and adverse regulatory
changes (upcoming ASIC review of F&I practices).
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Disclaimer(s): Analyst owns shares.
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