ASX code: AHG
Share price: $3.80
Industry: Retailing
Consensus forecast FY2017 Dividend: $0.24
Automotive Holdings Group Ltd (ASX:AHG) is one of the leading automotive retailing companies in Australia with an industry leading market share of ~7%.
Listed on the ASX in 2005, AHG originally began as a Holden dealership in Perth called City Motors. Since then the business has expanded in WA and across the nation and currently represents 9 out of the 10 of the top selling volume brands, has a small exposure to truck brands, as well as Mercedes-Benz in the luxury space.
While industry growth rates are low (~2%) compared to GDP growth, AHG is actively looking to grow market share via acquisitions, taking advantage of the current fragmented industry structure. These acquisitions are earnings accretive due to the relatively lower acquisition multiples of target companies and availability of synergies.
The company also operates a refrigerated and cold storage businesses, contributing ~13% to Group profits. This business has arguably underperformed over many years with the businesses requiring large levels of capital expenditure, while margins continue to be competed away resulting in declining return on assets. Return on Assets have fallen from ~20% in FY09 to be sitting closer to 5% currently. Part of our current investment thesis is that the recent change in Management is a catalyst for the divestment of this businesses with available capital utilised within its core competency of expanding its automotive dealing business.
The key risks with our investment thesis is the current ASIC inquiry into income derived by dealers via finance and insurance products which is likely to be a near term headwind to earnings. Having said this, dealerships have multiple revenue streams available to them and can likely partially offset the potential headwinds to earnings. Further to this, the recent sell off in the share price from ~$5.00 in late August to current prices suggests at least part of this risk is factored into the share price already.
In our view, AHG currently trades well below our sum of the parts valuation of ~$4.60 and offers an attractive fully franked annual yield of 6.3%. The recent change in Management provides a near term catalyst for the divestment of the underperforming business likely to see our investment thesis realised.
Originally published in The Australian on Tuesday 15th November 2016