Eagers Automotive: Stalled supply sees order book accelerate

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

26 August 2022, 9:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• Eagers Automotive's (ASX:APE) underlying NPBT of A$195.1m was in-line with guidance.
• Conditions have remained consistent: no deterioration in demand to-date; and supply still relatively constrained. The order book outcome is +32% over 1H22.
• We estimate APE’s order book represents ~6-mths of typical deliveries. The strong embedded margin within orders; and an expectation of restricted supply persisting supports the near to medium-term earnings outlook.
• Vehicle supply is the swing factor to near-term (FY22) earnings. Cycle aside, APE is working on building sustainably higher earnings via further consolidation, EA123 strategy execution, ongoing efficiency, and new OEM strategies (BYD).

1H22: consistent metrics; deliveries the swing factor

APE delivered pre-guided underlying NPBT of A$195.1m (pcp A$218.6m). Statutory NPBT of A$246.5m benefited from ~A$50m of asset sales (Bill Buckle) in the half. The 1H22 ordinary dividend of 22cps was up 10% on the pcp. 

Group underlying PBT margin of 4.63% was consistent on FY21 (1H21 4.65%; 2H21 4.62%). GP margin at 18.8% is healthy (flat on FY21 avg), sitting ~80bps above APE’s 18% long-term average. 

Operating cashflow of A$232m was +14% on the pcp. Net corporate debt (excluding bailment) ended at ~A$13m (pre acquisitions to settle of ~A$205m).

Strong conditions being smoothed by restricted supply

Demand/supply & order book: APE’s order book is up 32% on Dec-21 which we estimate at ~6-mths of typical deliveries. Demand continued to run well ahead of supply which mgmt noted has continued through July/Aug.

Current order take is up ~25% on the pcp (covid impacted), which implies order take has remained steady in recent months (despite the backdrop of weaker consumer confidence).

Supply and margin outlook: supply remains constrained and the short-term ‘swing factor’. APE noted that near-term supply looks encouraging (vs 2021 levels), however structurally could remain constrained for years.

Current conditions are highly supportive to GP (‘metal margin’) and the time to ‘unwind’ the order book supports the margin outlook into FY23 (and potentially beyond).

EA123: volume was +33% and revenue +43% on the pcp, however APE noted GP margin eased due to competition for used stock. Further investment was added (reconditioning, buying teams, tech), with mgmt highly confident in the roll-out and medium-term strategy.

BYD & EV’s: first deliveries of BYD will occur in 2H22 (national JV). Given the affordable EV entry point and likely Government policies to be introduced to accelerate EV adoption, BYD has the potential to be a meaningful contributor.

Consolidation to continue: APE will settle the ACT acquisition in 2H22 (~A$450m revenue pa) and has acquired a SA network (A$100m revenue pa). We expect consolidation to be ongoing, with few OEM/geographic limitations.

Forecast and valuation update

We make relatively minor EPS upgrades (~1-2%). We forecast FY22 underlying PBT of A$395m, implying a slightly stronger 2H (supply the clear swing factor).

FY23/FY24 margin assumptions: our FY23/24 PBT margin is 4.4%/3.9%.

Investment view – Add maintained

We expect changing industry dynamics will support scale operators long term and we see APE’s recent strategic moves (BYD and further consolidation) as providing early evidence.

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

Risks

Key risks: further deterioration in car supply; significant demand fall; further F&I regulatory risk; inability to increase finance contract penetration; and inability to extract from the EA123 business/losses.

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