Eagers Automotive Captures Share Amid Declining New Vehicle Sales

We maintain our AUD 9.50 fair value estimate for shares in narrow-moat Eagers Automotive following the release of fiscal 2020 results. Underlying net profit doubling to AUD 131 million was effectively preannounced when the firm updated the market on Dec. 11, 2020 and again Jan. 27, 2021. Despite new car volumes in calendar 2020 down significantly on the prior corresponding period, or pcp, pricing has held up strongly. This has helped bolster strong operating margins, buoyed by government assistance (AUD 134 million in wage subsidies) and cost-out initiatives in response to COVID-19 (saving around AUD 100 million on an annualised basis, mostly in staffing reductions). Fiscal 2020 also represents the first full year of earnings contribution from the transformative merger with similar-sized peer Automotive Holdings Group. As expected, Eagers has resumed dividends, declaring a fully franked final dividend of AUD 0.25 per share. We forecast the dividend payout ratio to return to typical levels of around 70% of underlying EPS from fiscal 2021, and we are confident the firm can maintain this payout ratio without stretching its balance sheet or compromising expansion plans.