Motorcycle Holdings: Another upgrade… it’s been a big 6 months

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
02 February 2021, 5:00 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

  • Motorcycle Holdings (ASX:MTO) has upgraded its 1H21 EBITDA guidance once again, with new guidance implying c170% growth yoy.
  • Strong margins remain the key driver of growth, while volumes have also been robust. New brands, dealerships and the Finance JV have also contributed.
  • Some of the tailwinds MTO is currently experiencing will likely ease in time, meaning earnings are likely to reduce from current elevated levels at some stage.
  • The enduring benefit of the current landscape for MTO is its materially improved BS position, meaning investors should see a return to dividend income. Hold rating maintained; PT increased (login to view revised target price).

1H21 guidance upgraded again…it’s been a big 6 months

MTO upgraded its 1H21 EBITDA (pre-AASB16) guidance to A$26-27m (+173% yoy at the top-end; and up from the A$23-25m guidance set in late Nov 2020).

The guidance includes cA$5.8m of JobKeeper received in 1Q21, although management noted that this mitigated the dealership closures in VIC during the period.

MTO’s 1H21 EBITDA is effectively the equivalent of that earned over the entire FY20 period. The group continues to benefit from strong margins as stock shortages persist, in addition to new dealerships/brands and a generally supportive demand environment.

We expect the key driver of earnings strength is margins, while volume growth has also been strong. MTO noted that it expects margins to trend towards more normalised levels as stock positions improve (no time frame provided).

Strong balance sheet should allow for a good yield

We expect MTO to exit 1H21 in a net cash position, a remarkable turnaround in its financial position over the course of CY20 (assisted by cA$12m of JobKeeper subsidies, stock shortages and strong free cash generation).

We estimate that ~A$10m of inventory investment is required to bring stock on hand back at more normalised levels. Despite this, we see the BS as now being in a strong position and therefore likely allowing for the recommencement of dividends from 1H21.

Assuming a 55% payout ratio (our assumption), this would equate to a yield of 8.5% at the current share price (we forecast earnings to fall in FY22 and our forecast yield in this year is c5%).

Another round of FY21 upgrades

We have increased our EPS forecasts by 7.8% in FY21 and c1.5% in FY22/23.

We forecast MTO to achieve FY21 EBITDA of A$40m (A$27m/A$13m 1H/2H). Our 2H21 forecast implies cA$2.2m/month, down from cA$3.5m in 1H21 (excluding JobKeeper).

We have assumed that margins/volumes normalise somewhat in the 2H, however this will largely be a function of when inventory availability eases. Should shortages persist, there would likely be further upside risk to our 2H21 forecasts.

While forecasting into FY22 is difficult, for now we continue to assume that EBITDA falls materially (-35%) to A$26m.

Hold rating and increased PT

We are mindful of the powerful force created by industry-wide stock shortages and major redirection of spend in the wake of COVID. However, industry volumes are still below CY16 peak levels and MTO’s balance sheet position has improved materially.

We do see a risk that once the current margin tailwinds ease, MTO’s earnings could fall from the current run-rate and therefore potentially understate MTO’s earnings multiple in future years. Hold rating maintained; PT increased (login to view revised target price).

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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