Eagers Automotive: Restricted supply smoothing the cycle

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

30 May 2022, 10:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• Eagers Automotive (ASX:APE) provided 1H22 guidance at its recent AGM, expecting underlying PBT of A$183m-A$189m (down 12-15% on pcp). Whilst below consensus expectations, a stronger 2H22 is logical and our FY22 forecast changes are minor.
• Ongoing supply constraints are impacting deliveries, however forward indicators (order book +25%; GP margin maintained) have remained strong in CY22 to-date.
• The market remains very cautious on the consumer spend (demand) outlook. Demand inevitably normalises (flowing through to lower margins), however we expect medium-term earnings will be better than APE’s valuation implies.
• Whilst there is no catalyst for a near-term re-rate, we see value at ~11.5x FY24F PE. APE is well placed to capitalise on supply/demand dynamics, building sustained higher earnings via consolidation (scale); its used car (EA123) strategy; ongoing efficiency; and new OEM strategies. Add rating maintained.

AGM trading update and 1H22 guidance

APE provided 1H22 underling NPAT guidance of A$183-189m, down 12-15% on pcp (A$214.8m excluding the divested Daimler business). The softer 1H (vs pcp) reflects supply constraints (total market deliveries down 3.5% YTD; or down ~6.5% in volume brands APE is well represented in); and a Covid disrupted January. 

Trading update comments included: demand continues to outstrip supply (order write YTD is 33.8% above deliveries); order book is up 25% on Dec-21; new car gross margin is in-line with CY21; EA123 volume/revenue growth of 32.6%/51.7% on pcp; CY22 total car market deliveries expected to be in-line with CY21; and the group is well positioned to deliver a strong 2H22.

APE has signed a binding agreement with BYD and expects first deliveries in 2H22. The ACT acquisition is also expected to complete in July-22, which will see APE have approx. 30% market share in the ACT.

Restricted supply is smoothing out the cycle

Order book: we estimate APE’s order book at ~4.5 months supply (~42-45k units), which can grow to >6 months by Dec-22 based on current demand.

Assuming an order book of ~2 months is sustained under a more permanent ‘build to order’ OEM model, we estimate APE will have an embedded ~A$50m-100m PBT pool to ‘unwind’ into earnings over FY23 (and potentially beyond). We estimate that if supply increases by 10% and demand falls by 20%, it will take ~18-months to clear the current order book (with a ~2-month permanent order book sustained).

Normalising margins and what’s implied?: We provide some high-level margin sensitivity overleaf. Whilst we forecast margins to reduce, we expect APE can deliver a sustainably higher margin via cost-out. If we apply APE’s historical average PBT margin to current turnover, the stock is trading on ~14.5x PE.

Forecast changes and assumptions

FY22 expectations: we forecast FY22 NPAT of A$394.5m (implied ~A$207m 2H22 NPBT). Annualised 1H guidance is ~A$375m, with our expectations of an incremental A$20m in 2H22 from: ACT acquisition contribution (~A$4-5m); seasonally higher OEM incentives in 2H; cycling the Jan-22 disruption; and an expectation of improved supply (the biggest swing factor).

FY23/FY24 margin assumptions: our FY23/24 PBT margin is 4.2%/3.8%. Our FY24 assumption allows for ~100bp GM ‘normalisation’, whilst retaining ~70bps of margin improvement (primarily cost efficiencies).

Investment view

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 can be offset by further consolidation (enabled by balance sheet strength), ongoing efficiencies, and delivering on the used car strategy.

Whilst there is no near-term catalyst (and uncertainty around the consumer demand environment is likely to persist), we see solid value on ~11.5x FY24F PE.

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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