First quarter calendar year 2018 – Motorcycle sales volumes show improvement
1QCY18 industry data showed a much improved quarter-on-quarter (qoq) performance, although growth remains modestly negative. New road motorcycle sales volumes fell 2.6% to 9,648 units. This compares to the negative 10-20% declines seen across the CY17 quarters.
On a brand-by-brand basis, Harley Davidson underperformed, recording a 19.9% decline on the previous corresponding period. This was largely offset by gains in Honda (+6.8%), Yamaha (+6.0%) and Kawasaki (+7.7%).
Taking a look at motorcycle brands retailed by Motorcycle Holdings (MTO) specifically, 1Q18 volumes were slightly better at -1.1%. It is pleasing to see that the steep declines recorded in CY17 have flattened out; however, the performance of Harley Davidson in particular is key given MTO is over-indexed to this brand and it carries a higher margin and attachment to accessories.
We expect used Harley Davidson bike sales are assisting, as they have done in previous industry downturns.
Paring back our forecasts
The industry data, whilst showing good qoq improvement, sees us lower our forecasts – particularly in light of the performance of Harley Davidson which is a material earnings contributor for MTO.
We have also pulled back our Cassons forecasts given accessories sales are intrinsically linked to the new bike sales market. In combination, we have pared back our EPS forecasts by 9% in FY18, 8.9% in FY19 and 9.6% in FY20.
A reminder of the growth levers in FY19
Looking forward, we believe a number of factors could see a rebound in FY19, including:
Insurance income commissions will be reset (cA$2.5m impact in FY18)
Cycling very soft trading conditions in the previous corresponding period
Full year contribution from recent dealership (relatively immature) and Cassons acquisitions (additional four months) which should benefit from synergies with the existing MTO footprint
Implementation of used bike sales in MCA retail stores (approvals in place and first site to launch this month)
Commencement of the Allied Credit JV (white-label finance product) being sold through MTO dealerships (contributions likely from FY20)
Further dealership acquisitions
Good value down here
Soft industry trading conditions have been coupled by a material de-rating in MTO's share price to the point where the stock is trading on 10x FY19F (EPSA) and a 6% yield. We are confident industry conditions can bounce back over time which, coupled with cost-out during current difficult trading conditions, should provide some decent opex leverage in time.
Motorcycle/car cycles play out over time and we believe this one creates a good opportunity on a medium-long term view. We maintain our Add recommendation with a revised share price target (Morgans clients can login to view).
Morgans clients can login to view our detailed report and revised share price target for Motorcycle Holdings (MTO). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
Disclaimer: Morgans Corporate Limited was lead manager and underwriter to the entitlement offer of shares in Motorcycle Holdings Limited and received fees in this regard.
Analyst owns shares.
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