EUR 850.00 For Business Accounts Only

Morningstar | Automotive Holdings Group Remains Undervalued Following a Challenging First Half

We retain our AUD 2.60 fair value estimate for Automotive Holdings following a challenging first-half fiscal 2019. Underperformance in the core Auto Retail segment led to considerably lower operating profit of AUD 24 million compared with AUD 42 million achieved in the prior corresponding period. We have tightened our near-term estimates for the embattled Automotive Retail segment, but our long-term forecasts remain largely intact. Automotive Holdings' portfolio of brands and extensive scale affords a cost advantage, underpinning its narrow economic moat, which should allow the firm to continue to capture share. The firm cut the fiscal 2018 guidance range to AUD 50 million-AUD 56 million, with the midpoint 8% lower than that of the previous guidance’s of AUD 56 million-AUD 59 million. We reduce our fiscal 2019 forecast by 11% to AUD 50 million, at the bottom end of management's guidance.

The difficulties in Australian automotive sales are no surprise. Tightening lending standards and the negative wealth effect from falling housing prices have weighed on big-ticket items like new car sales volumes. However, we view this as a cyclical challenge, which the firm will overcome. Despite the near-term pain forecast for the next two years, we expect vehicle sales volumes to return to fiscal 2018 levels by fiscal 2023. With incremental market share gains, we expect Automotive Retail to expand revenue at a CAGR of 3% over the next five years. With improving vehicle sales and the benefits of operating leverage, we expect a gradual margin improvement to drive an EBITDA CAGR of 4% over the same period.

No interim dividend was declared, and management noted the target dividend payout of 65%-75% of underlying profit has been suspended until the balance sheet is back in shape. This is prudent, as debt levels are currently above the firm's target gearing range and reduces the chance of Automotive Holdings needing to raise equity--which we do not expect.

Following the suspension of dividends, we forecast fiscal 2019 net debt to EBITDA of around 1.7, excluding floor plan finance. This is higher than optimal, but we expect the firm can afford to reinstate dividends during fiscal 2020, while still reducing gearing to more comfortable levels of around 1.5.

Statutory net loss after tax for the half was AUD 226 million. The difference between the underlying and statutory numbers was predominantly due to two major non-cash impairments, disclosed earlier in the month. An impairment of AUD 145 million in Automotive Retail reflected the soft market conditions, and a few underperforming automotive brands and locations. The AUD 79 million impairment in Refrigerated Logistics represents a write down of the entirety of goodwill in the firm's cold storage and transport operations.

A strategic review of Refrigerated Logistics has also been announced. Given the division is an underperforming, noncore part of Automotive Holdings' business, we are not surprised. The segment was nearly sold in 2018--for a good price--before the sale fell through. It remains to be seen whether Automotive Holdings decides to turn the division around, or whether it will be able to find another suitor at a similarly attractive price.