Eagers Automotive: Supply issues smoothing out strong demand

About the author:

Scott Murdoch
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.

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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Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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