AP Eagers (APE) AGM commentary provided interesting and helpful insights into current industry dynamics and the medium to long-term outlook for the group. With cA$11bn of costs associated with the Australian automotive retailing industry, it is clear that this needs to be 'dramatically reduced' over time given the significant change the industry is facing (Electric and Autonomous vehicles, ride/car sharing etc).
In our view this relates to the current retailing model of prime retail 'strip' locations with glass (i.e. costly) display centres. APE's recent announcement of its Brisbane Airport Mall plans for FY22-onwards is an example of how APE sees the future of automotive retailing in the medium to long-term.
Acquisitions back on the cards; likely in 2H18
APE noted that challenging industry conditions, primarily resulting from a meaningful decrease in industry profitability due to F&I changes, will increase industry consolidation for smaller (and larger) dealership groups. APE noted it has been active in reviewing, and will continue to review, acquisition opportunities. The group is currently doing due-diligence on a specific 'quality' acquisition, which is likely to fall in 2H18.
FY18 to be marginally ahead of last year
APE did not provide specific guidance, but noted it expects FY18 to be 'marginally ahead of last year'. In terms of 1H18, APE noted this is difficult to forecast given the material 1H skew (c45%) to May and June. However, it did state it 'expects no surprises' for the rest of 1H18. We are mindful that APE (and the industry in general) experienced quite strong trading in May/June 2017 and therefore the base to cycle steps up into 1H18-end.
On the back of management's commentary, we have made slight reductions to our underlying Automotive Retailing forecasts. However, we note the the likely acquisition noted above is not factored into our forecasts and would be EPS accretive if completed by mid-late FY18. We forecast FY18 NPAT of A$141.8m (vs A$140.8m in FY17).
We believe a further re-rating from here requires decent earnings upside vs our forecasts. In our view this upside is most likely to come from one or more of the following:
- A material improvement in underlying trading and margins
- Stronger operating cost optimisation/removal of loss making units
In our view acquisitions is most likely.
While trading conditions remain difficult, we believe APE is now better placed to grow due to a restructured base business, more sensible manufacturer hurdles, cycling the F&I impact and increasing likelihood of acquisition activity.
Key risks include further regulatory pressure on F&I earnings, margin pressure, slowing vehicle sales and materially higher interest rates.
We maintain our Add recommendation.
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Disclaimer(s): A Director of a related entity of Morgans Financial Ltd is a Director of AP Eagers Limited and will earn fees in this regard.
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