Motorcycle Holdings: Cruising through disruption

About the author:

Author name:

By Jared Gelsomino

Job title:

Associate Analyst

Date posted:

01 March 2022, 12:00 PM

Sectors Covered:

Consumer Discretionary/Diversified Financials

• Motorcycle Holdings' (ASX:MTO) 1H22 result (pre-released): revenue +8.5% to A$237m (pcp A$218.4m); EBITDA (pre-AASB 16 / excl. JK) -5.7% to A$19.8m (pcp A$21m); and NPAT -4.1% to A$12.6m (pcp A$13.1m).
• A strong result for MTO, comping an elevated base (1H21 EBITDA A$21m excl. JK) with significant lockdown impacts to dealerships (16 affected in 1H) and a challenging environment for retailers (ongoing supply chain disruption).
• MTO have pointed to a normalising of trade through Feb (Jan significantly disrupted), increasing demand momentum and ongoing supply constraints (GM tailwinds for MC dealers). We expect an abating of lockdown impacts and incremental acquisition contributions will improve the seasonally lower 2H skew.
• Trading on ~8x PE; a clean balance sheet (~A$5m net debt); ongoing favourable trading conditions (robust margin dynamic; easing supply constraints); and clear intent to continue to scale via acquisition, we maintain an Add rating.

Event: Strong 1H22 result and big dividend

MTO has reported 1H22 Underlying NPAT of A$12.6m, down ~4% on the pcp; and up +13% HoH. Underlying EBITDA (pre-AASB 16) was pre-released at A$19.8m and was down -5.7% on the pcp (ex-JK of A$21m); and up +11.9% HoH.

Divisional GP growth (vs. pcp): New MCs +3.7%; Used MCs +8.8%; Retail parts/accessories -9.6% (most susceptible to lockdown impacts); Wholesales accessories flat; Service +5.2%; and F&I +2.7%.

MTO closed the period in a strong balance sheet position (~A$5.1m net debt). Net op. cash flow of A$11.7m was lower on the pcp – driven by an increased inventory position to mitigate further supply chain disruption.

A big interim dividend of 12cps and MTO reaffirmed the target payout of 50-70% of NPAT. We expected a similar dividend in 2H (typically flat HoH) – bringing the full year DPS to ~24cps (up 20% on pcp) and an implied ~64% payout.

Analysis: Looking for margin uplift in 2H

1H22 lockdowns created significant disruption across MTO’s 16 affected dealerships – particularly across higher margin Retail Parts/Accessories business. Similar conditions were felt in Jan-22, however, conditions had pointed to a normalising in Feb-22, prior to recent flooding through SE QLD.

MTO noted on the conf. call that three dealerships were impacted; one holding inventory; ~one week of trading impacted for each; and the impact on FY22 is expected to be immaterial.

GP margin of 28.1% was down ~150bps on the pcp (29.6%). MTO have attributed the lockdown impacts (~16 dealerships affected) to a reduction in Retail Accessory sales (higher margin) and an increase in lower margin new MC sales (off road bikes increased). Wholesale GP margins improved (offsetting revenue decline), with MTO expecting demand to remain high in 2H.

MTO has shown a willingness to flex its strong balance sheet position (~A$5m net debt) with its 1H22 acquisitions, providing an immediate contribution and further optionality for future acquisitions (incl. product expansion – i.e. mowers).

Forecast and valuation update: FY22-24 EPS upgrades of +6% / +4% / +2.8%

We make modest upgrades to our forecasts, improving our confidence in the sustainability of demand.

We upgrade our DPS forecasts in-line with 1H22’s ~64% payout. Our forecasts do not assume acquisitions, which is clear upside if MTO continue to consolidate.

Investment view: Add maintained

We believe MTO has strategically developed its business (acquisitions; product diversification) over the COVID period, suggesting a level of sustainability in earnings beyond simply the union of tailwinds it has capitalised on.

Trading on ~8x FY22F PE, MTO is at a >20% discount to its 5-year average (~10.5x) and comparable listed auto peers averages (PWR avg. 11.9x and APE avg. 18.2x), which we view as unwarranted. Add rating maintained.

Risks

Downside: COVID-19 impacts; deterioration in general economic conditions; loss or deterioration in relationships with manufacturers; regulatory change (F&I); and loss of key management personnel. Upside: Large acquisitions.

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