BUY HOLD SELL – Autosports Group (ASX: ASG)
Autosports Group (ASX: ASG) is best known for dealing in the luxury car market, representing brands like Aston Martin, Bentley, Lamborghini, Maserati, McLaren and Rolls-Royce. It has more than 40 retail businesses throughout Sydney, Melbourne, Brisbane and the Gold Coast. The new vehicle segment of the business made up the bulk of its revenues in the first half of 2021, contributing ~62%. Used cars made up ~23% and the parts and servicing arm a small but not insignificant ~11%.
Autosports group has seen its share price rise ~120% over the year, buoyed in part by a robust car market. New vehicle sales totalled 100,809 in May, up 68% from a year ago – the highest number of sales for the month of May in four years, according to FCAI. Looking at those results in the context of 2019, which takes out some of the ‘noise’ from COVID, sales were up 8.9%. A result that feeds directly into AGS’s coffers with the business accounting for ~2% of the entire new vehicle market in Australia.
What is more engaging and relevant to ASG is the number of new luxury vehicles being sold, with sales numbers recovering from a six-year low in October 2020 to hit a 31- month high in May.
It is not a surprising statistic given many households’ and businesses’ balance sheets are in “better shape” than before the pandemic. The wealth effect a convenient reason for the uptick in Porsche pilots, with economic theory suggesting people spend more as the value of their assets rise. Given the property market is booming and the ASX 200 is resetting record highs, it’s a reasonable conclusion to draw. The fact that people haven’t been able to spend money on overseas holidays and a lot of other things during lockdown probably also helps. The RBA’s upgraded economic outlook adds weight to the argument that favourable economic times are likely to persist. How much of that ASG will capture is another question entirely but its outlook and the current trend in the automotive sector points to upside risk.
Half year results in February didn’t sit well with the market, the stock fell 7% on the day as profit and revenue numbers both came in short of expectations. A 2c dividend was declared. Management comments highlighted solid trading into the new year but optimism was drowned out by calls revenue growth would be constrained by new vehicle supply. To soften the blow, the board said that margin improvement was expected to flow from supply limitations. A catch-22 situation. A favourable environment for acquisitions was also alluded to, ASG naming the fragmented automotive market from a franchise perspective as an opportunity.
- ASG sits on a modest ROE of 10.9%, forecasts see that number easing to 8.9% in FY23.
- EPS growth is anticipated to outpace revenue growth this year. EPS growth is then expected to take a breather but remain around 20c in the following periods.
- A PE of 12.1x is not what you’d call expensive, peers in AMA and APE sit on 30.4x and 18.1x respectively.
- A gross yield of 3.5% is a touch below the market average, APE has a gross yield of 4.8%.
- Of the brokers surveyed by Thomson Reuters, 100% have a BUY or STRONG BUY rating.
- ASG is trading at a 4% discount to the average broker target price and a 33% premium to intrinsic value.
WHAT SORT OF INVESTMENT IS ASG?
ASG is a growth play geared to the economic recovery, with a yield slightly under the market average. The company stands to benefit from the current trend in the automotive market with record new vehicle sales a direct reflection of the performance of the broader economy in terms of consumer and business confidence. Business conditions hit another record high, according to NAB’s most recent survey, and it is beginning to feel more like we’ve reached the growth phase and moved passed the recovery stage for most parts of the economy. Optimism aside, ASG has also been a beneficiary of the ‘spendathon’ budget with the government introducing an immediate tax write-off for assets to the value of $150,000 as part of its COVID-19 response.
On the other side of the equation, there are concerns the business has been more of an acquisition fuelled growth story rather than an organic one. While arguably less of a major concern, the global chip shortage is another consideration to be wary of. Expectations see shortages into at least 2022. Automakers including Toyota and GM have been forced to idle or reduce production at some plants.
ASG satisfies the ‘bottom left to top right’ criteria, up more than 160% since June last year. The jagged trading pattern evident in the second half of 2020 points to a low level of liquidity, looking at the buy/sell spread confirmed that suspicion. The stock is down ~10% from its recent high achieved at the start of June, currently finding support at the 250c level. RSI in the middle of the range, neither overbought or oversold.
UBS and Macquarie both upbeat on ASG, UBS observing vehicle demand is robust, the broker believes supply tightness is helping keep prices buoyant. Lifts EPS forecasts for FY21-FY23 by ~9%. Estimates year-to-date volumes are up 7% versus pre-covid levels. Macquarie notes margins are above pre-COVID levels and estimates supply will remain limited throughout FY21, ups EPS forecasts and price target to reflect earnings growth and lower net debt. ASG was also named as a business that has benefited from the economic rebound but still has capacity for growth. Improving margins and a normalisation of its service, parts and panels division also expected to add to its growth prospects.
Autosports is chaired by former Woolworths chief financial officer Tom Pockett. WOW rose 150% (not including dividends) in the time he was there and while it’s obvious his employment wasn’t the only factor behind the price increase, it does offer some encouragement that he knows what he’s doing. It would be far less attractive if he served through a period of underperformance.
No clear skew to buyers or sellers, Celeste Funds Management buying more than 10m shares last December helping outweigh a 7m share sale in April by First Sentier Investors. Directors Nick and Ian Pagent added to their interests in the business back in March.
A stock with no short interest at all. The y-axis reminds you how small those peaks back toward the end of 2020 really are.
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