Eagers Automotive: Order book shifts up a gear

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

25 February 2022, 9:30 AM

Sectors Covered:

Diversified Financials, Professional Services

• Eagers Automotive (ASX:APE) reported underlying PBT of A$401.8m (guidance A$390-395m), up 92% on the pcp. The 2H result absorbed a ~A$25m PBT lockdown impact (mgmt estimate).
• Demand continues to outstrip supply, resulting in a record order book (+215% on the pcp). We expect this would be >4-months of deliveries.
• The margin sustainability ‘debate’ will likely persist until supply normalises. Near-term margins should prove resilient given the embedded GP in the order book, removing lock down impacts, and ongoing efficiencies.
• APE announced a (non-binding) agreement to establish a JV with Chinese based EV manufacturer, BYD. The JV will be the exclusive national BYD retailer in Aus.
• Vehicle supply is the swing factor to near-term (FY22) earnings. Sustainably higher earnings can be driven via further consolidation, EA123 strategy execution, ongoing efficiency, and new OEM strategies (BYD). Add maintained.

Event: Strong year with NPBT +92% on pcp

APE delivered NPBT (pre-AASB16) of A$401.8m, up 92% on the pcp (ahead of A$390-395m guidance). PBT fell hoh (1H A$218.6m; 2H A$183.2m), with mgmt estimating lockdown impacts of ~A$25m in 2H (2H21 therefore normalised at A$208m). The 2H dividend of 42.5c (+70% on pcp) beat expectations.

Group PBT margin was strong yoy (FY21 4.6% vs 2.4% pcp) and relatively flat hoh. Gross margin of 18.7% (up from 17.9%), with 2H21 showing further expansion (1H 18.3%; 2H 19.2%). 1H included the divested Daimler (assumed lower margin). 

Operating cashflow of A$303m was solid. Net corporate debt (excluding bailment) stood at ~A$128m, flat on pcp (A$129m). In the period APE sold its Daimler Trucks business, increased the property portfolio to A$451m (vs A$356m pcp), and maintained a strong liquidity position of A$733m.

Order book gives near-term visibility – especially for margin

Record order book: order-take outstripped deliveries every month through the half (and has done so since May-20), adding to the order book which is up 215% on the pcp. The quantum of orders wasn’t provided, but we expect it’s >4-months of deliveries. APE noted demand has stayed robust, with 4Q21 up 10% on pcp. 

Ongoing consolidation: three smaller acquisitions were undertaken in FY21, including ‘strategic property’. Ongoing consolidation will feature.

EA123 profitability: EA improved profitability to ~A$10m PBT (an incremental A$6m), although was impacted by 2H Covid lockdowns. APE is confident in the sourcing and reconditioning processes and now intends to scale the business.

BYD term sheet (non-binding): APE intends to establish a JV with BYD to become the exclusive national retailer of BYD electric vehicles in Australia. Chinese based BYD specialises in EVs and is the fourth largest car manufacturer (by market cap).

Margin outlook: we expect near-term margins will remain strong, given the embedded gross margin in existing sales, the continued demand/supply dynamics, and cycling the Covid impacts of 2H21.

Whilst gross margin on car sales (‘metal margin’) is expected to soften at some point, medium-term offsets include improving F&I penetration and operating efficiencies. We suspect softening of the metal margin may push out further than current market expectations.

Forecast and valuation update

We upgrade underlying PBT (pre AASB16): FY22 +1.5% to A$400m (noting that supply/delivery challenges present the swing factor) and FY23 +4.8% as we see delivery of the order book and solid margins pushing out further.

Investment view

We expect changing industry dynamics will support scale operators long term and today’s BYD announcement may be early evidence.

Normalising margins medium-term can be offset by further consolidation (enabled by balance sheet strength), ongoing efficiencies, and delivering on the used car strategy. Add maintained.

Risks

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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