Eagers Automotive: Supply issues smoothing out strong demand
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 18 November 2021, 10:00 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- Eagers Automotive (ASX:APE) released FY21 NPBT guidance of A$390-395m, ~5% below consensus and implying 2H22 NPBT of ~A$175m (down from 1H21 A$218.6m).
- APE estimate supply issues and lockdowns negatively impacted by ~A$20-25m.
- The order book continues to grow, providing solid earnings visibility into FY22. Whilst supply conditions are expected to remain tight well into CY22 (a key short-term swing factor), this environment supports elevated margins.
- Some uncertainty on margin sustainability, operating models (agency) and demand conditions may cap a near-term valuation re-rating. However, growth from further consolidation; EA123 strategy execution and ongoing efficiency improvements (inc property) can drive sustainably higher earnings long-term. Add maintained.
FY21 NPBT guidance provided
APE expects FY21 underlying operating PBT of A$390-395m (pcp A$209.4m); and statutory PBT of A$440-445m (stat uplift mostly 1H21 gain on asset sale).
2H21 has been impacted by lockdowns in key markets (NSW, VIC and Auckland), with 114 trading days impacted (primarily affecting service operations). Reduced and deferred sales in lockdown areas and supply constraints also impacted. APE has estimated the PBT impact at ~A$20-25m.
Supply delays smoothing out the buoyant demand
Order book growth continues: APE noted non-lockdown states (WA and QLD) continue to experience strong trading conditions and demand in lockdown areas has been “robust”. The order book has continued to grow and demand has outstripped supply since June-20 (17 mths).
This dynamic secures improved earnings visibility into FY22 (supply risks aside), with up to 3-mths of sales secured (our estimate) and the current order book having an ‘embedded’ favourable gross margin. Whilst strong demand will ‘normalise’ at some point, it can fall considerably before reaching 1H21/current delivery levels.
Small acquisitions added, we expect more to come: APE has acquired several dealerships to complete in FY21 (Toowoomba and Newcastle regions). Associated property acquisitions of A$45m will settle through CY22. We expect incremental consolidation to continue, with property rationalisation/efficiencies ongoing as APE increases scale in certain regions.
A look at forecasts
Implied (from guidance) 2H21 PBT is ~A$175m, or ~A$200m adding back the full estimated lockdown impacts. We estimate the 2H21 earnings ‘run rate’ (adjusting for APE’s stated lockdown impacts and an 2H21 OEM incentive estimate) at ~A$380m PBT.
Supply conditions are expected to improve, however remain variable across OEMs and there is risk improvement is delayed. Our FY22 NPBT forecast sits ~3% above our estimated 2H earnings run-rate.
We take a more conservative position on FY23 earnings, which factors in a PBT margin decline to ~4.2% (from ~4.75% 1H21).
We note our FY23 revenue is ~4% below 1H21 annualised levels, which may ultimately prove conservative given: the strength in order write vs deliveries and the potential for delays to continue to ‘push out’ revenue realisation; momentum in EA123; incremental acquisition contribution and any further acquisitions.
Investment view: Add maintained
Question marks will remain regarding sector dynamics: sustainability of demand/margins; introduction of agency models (two OEMs currently); and the longer-term impact of EV penetration.
Near-term, the unknowns may cap sector valuation multiples compared to historic levels (18x PE). Ultimately, we think industry dynamics support ‘scale’ operators (APE) long-term and could easily accelerate consolidation.
We see APE as well placed to participate in consolidation (balance sheet strength), in addition to organic growth initiatives (EA123; property and operating efficiencies). Trading on ~14x FY23 PE, Add maintained.
Key risks: further COVID-19 disruption; deterioration in car supply; significant demand fall; further F&I regulatory risk; inability to increase finance contract penetration; and inability to extract upside from the EA123 business/losses.
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