AutoWallis - Drive Shift

AutoWallis – Car dealership  

Recommendation: Accumulate

Target Price (12-month): HUF 123

Current Share Price: HUF 102

 

We are initiating coverage of AutoWallis with an Accumulate rating and see a 21% upside to our 12-month DCF-based TP of HUF 123. We note that our TP is highly sensitive to operating margin developments. If no margin improvement occurs while sales increasing in the coming years, we would reduce our TP to HUF 96, implying a 6% downside from the current share price, all else remaining constant. In the absence of a clear dividend policy, no dividend payment is included in our baseline valuation model.

AutoWallis is best in class in operations and a dominant player in CEE regional car dealership markets. It is present in 14 Central and South Eastern European Countries. AutoWallis had EBITDA of HUF 2.3 bn on revenue of HUF 65 bn in 2018, employing more than 300 people. AutoWallis has three main businesses: domestic distribution, international distribution and automotive services, accounting for 47%, 43% and 10% of its sales revenue and 4%, 36% and 60% of its pre-tax profit in 2018, respectively.

We see the market already pricing in strong revenue growth in the coming years. We expect AutoWallis’s organic top-line growth to reach a CAGR of 14% by 2024 on the back of 1) strong underlying car markets growth in the Central Eastern European countries, 2) product offering extension; and 3) regional expansion.

We expect EBITDA margin to improve from 3.2% expected for 2019 to only 4.1% by 2024 vs. management guidance for organic EBITD margin of 5.6%.

We expect organic EPS CAGR of 31% by 2024, albeit from a low base in 2018, driven by revenue growth and some expected improvements of operating margins. If no margin improvement is achieved, we believe AutoWallis still would have the potential to increase its EPS at a CAGR of 24% by 2024 based on expected revenue growth.

The primary drivers of organic EBITDA margin improvements and value creation will be new distribution agreements, like the one initialed recently with Jaguar Land Rover, organic regional growth, higher-margin add-on and aftermarket services, and cost reduction measures. International distribution is likely to generate relatively higher margins thanks to market penetration and income convergence towards EU levels. In contrast, domestic distribution is likely to see margins stagnating due to highly competitive premium car markets.

We believe investor sentiment towards AutoWallis will be determined by how successful the company will be in implementing its ambitious five-year strategy presented in May. We note that we found AutoWallis’ new strategy far too crude and simple for valuation purposes. Therefore, we decided to just focus on cash flows generated only from current businesses and disregard management guidance for earnings from acquisitions in the future.

As we assume no acquisitions in the coming years but constantly improving capital intensity, thus leverage should decline constantly after 2020. We note, however, that should AutoWallis carry out sizeable M&A, its leverage will remain high going forward.

AutoWallis’s shares look overvalued compared to its peers based on 11.4x 2020 EV/EBITDA. That said, we assume AutoWallis will deliver rapid revenue and earnings growth in the coming years. Besides fast earnings growth we assume a significant improvement in AutoWallis’ ROIC by 2024 as well, driven mainly by expected EBITDA margin expansion, which thus is likely to exceed peers’ ROIC ratio, justifying relatively higher valuation multiples for AutoWallis.

The new strategy gives us hope that AutoWallis will have the flexibility to effectively and strategically respond in many constructive ways to disruption caused by imminent technology changes and/or regulation and new customer trends. That, in our view, should also be reflected in its relative share price performance vs. the broader group of its peers going forward.

The ongoing megatrends in the car and dealership industries, such as electrification, connectivity, diverse mobility and autonomous driving, are expected to wipe out at least 100 bps from car dealerships’ return on sales by 2024. These megatrends while likely squeezing sales volumes and margins should create new opportunities in areas such as maintaining and operating car-sharing fleets, which could become a significant new source of income.

Attila Vago
Senior Analyst

CONCORDE SECURITIES LTD.

Hillside
55-61 Alkotás street, H-1123 Budapest.
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MEMBER OF THE CONCORDE GROUP

 

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