Automotive Holdings Group Car Dealerships (Credit: Automotive Holdings Group)

Automotive Holdings Group swung to a full year loss this year, as new car sales slumped for the 15th month in a row and the industry environment remains challenging. The company still had a positive operating NPAT of $58.7m for continuing operations, which is not too unreasonable for a cyclically challenged business worth $1.06bn. The main issue with the results however is the company declaring a statutory loss of $232.6m after tax which, in light of the company’s size, will make a significant dent on the group’s balance sheet. Within the automotive retail market, the company blamed the banking Royal Commission, wealth effects from the housing market decline and general economic uncertainty for the lacklustre sales environment.

One factor saving investors from a substantial stock market decline on the day is the ACCC saying that AHG can merge with AP Eagers. While the transaction was approved on the 25th of July, the guarantee of a buyer supported the share price, as investors know they can still get sell their shares to the acquirer. The regulator believes that there will not be concerns over competition in the new car market after the deal, either in the sub-markets for individual cities or nationally. It is important to analyse competition on both levels; while a local monopoly is much easier for consumers to avoid than a national one and thus presents less anti-competitive pressures, adequate local competition is still beneficial to consumers.

The company trades on a dividend yield of 2.1% and was projected to be on a forward FY21 PE multiple of 15. Bulls would argue that these multiples present an attractive opportunity to enter a quality company that will have market power through its position as the largest Australian car dealership business, which is temporarily weak on the back of cyclical factors. The deal is structured as AP Eagers taking AHG over, and the board has unanimously recommended that shareholders accept the offer in the absence of a superior proposal. This follows their successful negotiation for the withdrawal of previous conditions that their offer was subject to, and also helps explain why investors were not too phased by the bad news around AHG’s profitability. As such, investors would do well to analyse the combined group and reassess their investment views once the deal goes through, instead of focussing on the multiples for AHG in isolation.

 

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August 23, 2019