Peter Warren Automotive: Orderbook deceleration; acquisition acceleration

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

22 February 2023, 10:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• Peter Warren Automotive's (ASX:PWR) 1H23 result was broadly in-line, however showed the impact of higher opex flowing through. NPAT of A$30.2m was +19% on pcp; down 17% on 2H22.
• Gross margin improved on pcp (impact of Agency model), however fell ~120bps from 2H22 which mgmt attribute mostly to revenue mix (skew to new cars).
• PWR’s order book closed +4% hoh, reflecting a more balanced demand vs delivery environment. PWR noted that slight (~3%) order book run-off occurred in Jan-23.
• We are conscious of the operating deleverage impact on earnings as margins normalise; however the consolidation opportunity will assist.
• PWR is trading on ~11x our assumed more ‘normalised’ conditions (FY24/25). Industry consolidation will continue – we expect PWR to be a participant which adds to structural earnings capacity. Adding Toyota is a potential s-term catalyst.

1H23: strong revenue growth, however margins temper

PWR reported underlying NPAT of A$30.2m (+18.9% pcp; and -16.8% hoh). The half included a A$5.9m PBT contribution from the PMG acquisition. Ex-PMG, PWR delivered PBT growth of ~6% on pcp.

Result composition included (vs 2H22) revenue +7.1% to A$999m; gross profit up 1% (GM of 19.6% vs 2H22 20.8%; 1H22 19.1%); EBITDA down 7% (cost inflation/FTE added); and PBT -17% (higher interest rates flowed through on floor plan finance). Return on sale (PBT margin) fell to 4.3% (5.6% 2H22; 4.7% 1H22). 

Cash flow conversion was weaker at 52% (vs 94% 1H22), with PWR noting working capital movements (increased parts inventory) and elevated customer prepayments dragged on conversion. PWR ended with net corporate debt of A$41.7m (A$13.2m 2H22; 1H22 A$31.9m) and net debt relative to the property portfolio of 21%. 1H23 DPS was 11cps (+22% pcp).

Order book provides resilience; acquisitions to offset cyclical downside

GM and ROS swings: PWR’s 1H23 GP margin contracted ~118bps to 19.6% (vs 2H22 of 20.8%) and up ~54bps on pcp (19.1%). GM composition (vs pcp), included: +140bps from Benz Agency model impact (commission revenue booked with no COGS); +20bps in improved trading margins; and -110bps in dilutive composition mix (higher skew to new car sales).

We expect 1H23 reflects a reasonable GP % to sustain under current conditions (2H23 and into 1H24), however we factor in slight compression into FY24/25 as supply constraint eases and the potential for more competitive pricing returns. 

Order book: PWR’s order book was +4% hoh (up 61% on the pcp), starting to reflect a balance demand and delivery environment. We estimate the book still stands at ~5-6mths of typical deliveries.

PWR noted that the order book declined ~2.9% in Jan-23, which if the run-rate held would be a three year run-off (although we expect a 2-3 mth order book may be a new ‘normal’ level). PWR noted that order take in Jan-23 was slightly (~1.3%) down on the pcp, however deliveries were slightly ahead (+2.4%). 

Toyota may be close to mix: mgmt expressed confidence in the pathway to add Toyota into the brand mix, with the most obvious acquisition the original Peter Warren dealerships (two). We expect this would be ~8-10% accretive.

Funding capacity remains solid with gross debt at A$62.4m. We expect debt facilities of A$96m could be expanded to ~A$140m against the property portfolio.

Forecast and valuation update

EPS changes: FY23 -8.5%; FY24 no change; FY25 -1.5%.

Investment view: Add maintained

Investor cautiousness on the medium-term margin outcome (operating deleverage) for the industry and structural changes (Agency, EVs) continues to cap share price performance.

However, we believe PWR’s valuation remains undemanding and the consolidation opportunity provides the ability to add structural earnings potential.

Risks

Downside:

• Severe downturn in demand.
• Industry model operating changes (Agency model transition), inability to identify/integrate acquisitions (key growth pillar).

Upside:

• Continued demand strength (outstripping supply).
• M&A.

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