Eagers Automotive: Portfolio optimisation

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
31 March 2022, 8:30 AM
Sectors Covered:
Diversified Financials, Professional Services

  • APE has announced the acquisition of a portfolio of Canberra dealerships and associated properties (10) for A$205m. The portfolio was acquired from WFM Motors (Nick Politis controlled) and therefore requires shareholder approval.
  • The acquisition follows the very recent divestment of APE’s Sydney North Beaches dealerships (and properties) for A$92m.
  • We expect the net earnings outcome (all else equal) is ~3% accretion. The portfolio optimisation provides APE with immediate scale in the ACT which will enable further geographic expansion of growth initiatives (EA123, BYD).
  • Vehicle supply is the swing factor to near-term (FY22) earnings. Under the bonnet, APE continues to work on building a sustainably higher earnings base via further consolidation; its used car (EA123) strategy; ongoing efficiency; and new OEM strategies (BYD). Add maintained.

Event: Acquisition of Canberra, ACT portfolio

APE have entered into a non-binding agreement with WFM Motors Pty Ltd (WFM) to acquire a portfolio of dealerships and associated properties (10 owned properties; 3 leased) located in Canberra, ACT.

Consideration of A$205m includes the associated properties and can be funded via existing debt facilities (net investment post the Northern Beaches divestment of ~A$113m). APE recently announced the Northern Beaches divestment to allow for further acquisition opportunities (ie, to reduce potential geographic or OEM concentration). The ACT acquisition is of meaningful scale, however we see ongoing (likely smaller) consolidation as likely.

The acquisition will provide APE with immediate scale in the ACT (no previous representation), being the largest dealer group in the state. OEM brand representation includes Toyota, Ford, VW, Lexus, Jeep, Subaru, Mitsubishi, Volvo and GMSV. The dealership group annual turnover is ~A$450m (~5% of APE group FY21 revenue). 

The transaction is subject to shareholder approval and other conditions, noting WFM is controlled by Nick Politis (APE board member/major shareholder) and therefore requires shareholder approval (EGM in Jun-22).

Portfolio optimisation to assist organic growth drivers

Using APE’s current PBT margins, we estimate the earnings result of the dealership transactions is ~A$13m PBT (~3% accretion).

Further to the incremental earnings, APE’s immediate scale in the ACT assists the geographic expansion of its EA123 strategy and BYD presence in the state (BYD is still subject to finalisation). 

Vehicle supply remains highly constrained and industry commentary points to this persisting through CY22. The volume outcome is a major swing factor for FY22 (noting APE’s significant secured order bank reported at the Feb-22 result); however continued tight supply dynamics support sustaining higher GP margins through FY22 and FY23 (which may surprise on the upside).

Forecast and valuation update

We make very minor changes to forecasts (no change to EPS), however note the transactions (2H22 impact) provide some additional confidence in near-term earnings expectations.

Supply/delivery challenges continue to present the largest swing factor in FY22.

Investment view

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