Eagers Automotive: Ideal supply/demand conditions continue

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Former Senior Analyst
Date posted:
18 April 2021, 3:00 PM
Sectors Covered:
Consumer Discretionary (Retail)

  • Eagers Automotive (ASX:APE) provided a strong trading update, reporting 1Q21 underlying PBT of A$98m (+143% yoy).
  • APE continues to benefit from favourable supply/demand dynamics across the industry, bolstered by internal cost out strategies implemented in 2Q20. While supply constraints continue, they clearly aren’t severe enough to be impacting deliveries; while forward orders also remain strong.
  • We make meaningful (+27%) upgrades to our FY21 PBT forecasts and risk lies firmly to the upside should current conditions continue over the balance of CY21.
  • Longer-term, we believe APE’s Next 100 strategy (capital recycling/EasyAuto123 used car strategy/Auto Mall) will further assist the growth profile. We also see the likelihood of APE using its strong balance sheet to target strategic acquisitions over the medium term.
  • ADD maintained with a revised price target (login to view).

1Q21 update – A$98m PBT (+143% yoy)

APE provided a trading update, with 1Q21 underlying PBT expected to be A$98m (vs A$40.3m in the pcp). This compares to A$112m of PBT achieved in 4Q20 (noting that the 1Q is a seasonally weaker period).

The strong performance is attributable to: favourable supply/demand dynamics and ongoing benefits of the cost out program which commenced in 2Q20. We expect continued constrained supply and solid demand to continue over the balance of CY21.

The imminent sale of the Daimler Trucks business (and associated property) will further bolster APE’s strong balance sheet by A$108m. We are therefore mindful that APE may choose to deploy excess capital towards M&A activity.

We make ~27% PBT upgrades; upside risk if conditions continue

The 1Q is cyclical low point for APE in terms of industry volumes. Additionally, while APE receives OEM incentives at the end of each quarter, Toyota only pay incentives annually (in December each year).

It is therefore plausible, should current conditions continue, that A$400m of PBT is achievable in FY21. However, with 9 months to go (and two of the biggest quarters still at stake), we sit below this at A$340m PBT (vs. A$268m previously).

Still a number of levers to improve profitability med-term

It is clear that margins across the industry are highly supportive with demand outstripping supply handsomely.

Supply constraints will ultimately ease to some extent which will see auto margins normalise – although a potential structural shift in OEM supply to reflect a Just in Time model could see margins normalise at levels well above pre-COVID-19.

APE has the following stated initiatives which should assist in offsetting any earnings impact from lower margins as supply constraints ease:

  • EA123 upside
  • F&I penetration
  • Volume/demand (after a 3-year downturn which ended in November 2020)
  • AutoMall efficiencies
  • Further property acquisitions/portfolio optimisation.

ADD maintained; new price target

A strong 1Q21 outcome from APE, with the 4Q20 trends continuing. We believe there remains upside risk to our forecasts should current supply/demand trends continue longerthan we expect.

We continue to think APE is well-placed over the med-term, with further operational improvements/capital recycling/M&A/Next100 strategies expected to improve profitability over the med-term.

Following the above upgrades, our DCF/PE valuation/price target increases (login to view) and we maintain an ADD rating.

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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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