Company Reports

Narrow-moat Eagers Automotive's calendar-2023 revenue grew 15% to AUD 10 billion, near the top end of guidance and about 3% ahead of our forecast. This was driven mostly by record new-car sales in Australia, up 13% on 2022 to 1.2 million vehicles. Manufacturing halts, freight issues, and semiconductor shortages, which plagued shipments in the aftermath of the pandemic, are abating. New vehicle sales have risen despite pressure on household finances as the order backlog is filled.

We forecast that Eagers to continue to capture market share in the highly fragmented auto retailing segment. We estimate Eagers now boasts a market share of about 11%. As the largest dealer in the market, Eagers can centralize back-office operations and fractionalize these fixed costs over a significantly larger volume and revenue base, affording a durable cost advantage over smaller peers. Accordingly, we estimate the company earns gross and net profit margins ahead of smaller competitors. We believe Eagers' extensive size and scale should allow it to deliver midcycle profit before tax margins of about 4%.

We think narrow-moat Eagers Automotive is set to report that 2023 was another strong year. Data from the Federal Chamber of Automotive Industries show the new vehicle market has been on a tear, with a record 1.2 million units sold in 2023, a 13% improvement on 2022. The supply chain issues that plagued shipments in the aftermath of the pandemic, underpinned by manufacturing halts, freight issues, and semiconductor shortages, are abating. As the unprecedented order backlog is filled, sales have continued to climb despite heightened budgetary pressure on consumers.

We raise our fair value estimate for shares in Eagers Automotive by 6% to AUD 12.50 following the acquisition of Victorian dealerships at what appears to be a relatively attractive valuation. Subject to shareholder approval, Eagers is set to acquire 13 dealerships and three properties across Melbourne and the Mornington region from entities controlled by Nick Politis. As Politis is an Eagers director and 28% shareholder, shareholders need to approve the transaction at a meeting expected to be held in early 2024. Further information on the transaction will be provided in the meantime. We will follow up with a corporate action note ahead of the meeting.

We forecast that Eagers to continue to capture market share in the highly fragmented auto retailing segment. We estimate Eagers now boasts a market share of about 11%. As the largest dealer in the market, Eagers can centralize back-office operations and fractionalize these fixed costs over a significantly larger volume and revenue base, affording a durable cost advantage over smaller peers. Accordingly, we estimate the company earns gross and net profit margins ahead of smaller competitors. We believe Eagers' extensive size and scale should allow it to deliver midcycle profit before tax margins of about 4%.

We raise our fair value estimate for narrow-moat Eagers Automotive by 7% to AUD 11.80 per share. Underpinning the upgrade are higher calendar 2023 sales and operating margin forecasts for the core car retailing business. The favorable supply/demand imbalance created by vehicle delivery disruptions is easing but slower than we anticipated. We still assume margins moderate in calendar 2024 as conditions normalize and likely cyclical demand headwinds bite—but less sharply than previously expected. Despite the upgrade, shares are overvalued.

We maintain our AUD 11.00 fair value estimate for shares in narrow-moat Eagers Automotive following solid operating and financial performance in 2022. Underlying NPAT of AUD 262 million was 9% down on 2021 and just 1% below our forecast. The lower result was principally due to higher interest expense and AASB16 impacts, with underlying operating earnings roughly flat on 2021. EBIT margins in the core car retailing segment (now the vast majority of earnings) remained at historically high levels of 5.6% (versus 5.5% in the prior corresponding period). The 10-year average is some 200 basis points lower at 3.6%.

We maintain our AUD 11 fair value estimate for shares in narrow-moat Eagers Automotive following the release of interim 2022 results. Underlying net profit after tax, or NPAT, of AUD 129 million was 19% below the prior corresponding period, or pcp. We continue to expect that a repeat of 2021—where the stars had aligned for Eagers—would be a tough ask. In 2021, Eagers enjoyed exceptional pricing power from the combination of constrained vehicle supplies due to supply chain issues for semiconductor chips, and elevated consumer demand as Australian consumers had excess savings from restrictions on leisure and travel activities due to lockdowns and border closures, further bolstered by significant fiscal stimulus. We lift our full-year NPAT forecast due to first-half margin durability by 4% to AUD 261 million—10% lower than the pcp.

We maintain our AUD 11.00 fair value estimate for shares in narrow-moat Eagers Automotive following a trading update. The company anticipates underlying profit before tax for the first half of calendar 2022 of AUD 183 million to AUD 189 million—12% to 15% lower when compared with the prior corresponding period after adjusting for the Daimler Trucks divestment. We had already anticipated a repeat of 2021—where the stars had aligned for Eagers—would have been a tough ask. In 2021, Eagers enjoyed exceptional pricing power from the combination of constrained vehicle supplies due to supply chain issues for semiconductor chips, and elevated consumer demand as Australian consumers had excess savings from restrictions on leisure and travel activities due to lockdowns and border closures, further bolstered by significant fiscal stimulus. We make no changes to our AUD 368 million pretax profit forecast for the full year—8% lower than the PCP.

We maintain our AUD 10.50 fair value estimate for shares in Eagers Automotive following the release of interim fiscal 2021 results. Underlying profit before tax of AUD 219 million was preannounced in July 2021 (see our note "Eagers Has the Pedal to the Metal"), representing a fourfold increase on the prior corresponding period, or PCP, marred by coronavirus restrictions. While new vehicle sales were decimated in calendar 2020, particularly while restrictions were in place, sales have rebounded strongly as restrictions eased and government stimulus and pent-up demand flowed through. Australian new vehicle sales for the period are 28% higher than the PCP--a far cry from April 2020 lows where sales were nearly half that of the PCP.

Narrow-moat-rated Eagers Automotive is making hay while the sun shines, with a surge in new car demand and tight vehicle supply driving a strong start to calendar 2021. The auto retailer is expecting to report interim underlying profit before tax of AUD 219 million--a fourfold increase on the previous corresponding period, or pcp, marred by COVID-19 restrictions. New vehicle sales were decimated by the virus in calendar 2020, particularly while restrictions were in place, with national new vehicle sales down 14% compared with 2019. But as restrictions eased, Government stimulus and pent up demand flowed through to increased sales. New vehicle sales have rebounded strongly from April 2020 lows (where sales were nearly half that of the pcp) with year-to-June 2021 new car sales 28% higher than the pcp.

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.

We forecast that Eagers will continue to capture market share in the highly fragmented auto retailing segment. Following the merger with major player and former rival Automotive Holdings, Eagers now boasts an estimated market share of 11%. As the largest dealer in the market, Eagers can centralise back-office operations and fractionalise these fixed costs over a significantly larger volume and revenue base, affording a sustainable cost advantage over smaller peers. Accordingly, we estimate the company earns gross and net profit margins ahead of smaller competitors. We believe Eagers' extensive size and scale should allow it to deliver midcycle operating margins of around 3%.

We lift our fair value estimate for shares in narrow-moat Eagers Automotive to AUD 9.50, from AUD 9.00 previously, following strong trading through 2020. The lift to our fair value estimate is due in equal parts to a lift in our forecast of near-term earnings and the time value of money. Eagers released full-year guidance for calendar 2020 of underlying operating profit before tax of AUD 195 to AUD 205 million, compared with AUD 100 million in the prior corresponding period, or PCP, reflecting the first full year of trading following the Automotive Holdings Group merger. We lift our calendar 2020 profit-before-tax forecast to the lower end of updated guidance, from AUD 112 million previously.

We forecast that Eagers will continue to capture market share in the highly fragmented auto retailing segment. Following the merger with major player and former rival Automotive Holdings, Eagers now boasts an estimated market share of 11%. As the largest dealer in the market, Eagers can centralise back-office operations and fractionalise these fixed costs over a significantly larger volume and revenue base, affording a sustainable cost advantage over smaller peers. Accordingly, we estimate the company earns gross and net profit margins ahead of smaller competitors. We believe Eagers' extensive size and scale should allow it to deliver midcycle operating margins of around 3%.

We expect competitively advantaged Eagers Automotive to return to EPS growth in 2021 following a challenging year for auto sales in 2020. Despite being the first full year of earnings following the merger with Automotive Holdings, we expect earnings per share to decline in 2020 as coronavirus-induced shutdowns weigh on new-vehicle sales. However, we do not expect these headwinds to prove protracted. We forecast new-vehicle sales to pick up again in 2021, leading to a five-year EPS CAGR of 17%.

A.P. Eagers operates in the automotive dealership industry, selling passenger vehicles and commercial trucks. The company owns and operates automotive franchises, with more than 200 dealership locations across the country. In addition to vehicle sales, the company generates a meaningful portion of its revenue and earnings through the service, spare parts, and finance divisions.

A.P. Eagers operates in the automotive dealership industry, selling passenger vehicles and commercial trucks. The company owns and operates automotive franchises, with 72 dealership locations across the country. In addition to vehicle sales, the company generates a meaningful portion of its revenue and earnings through the service, spare parts, and finance divisions.

AP Eagers operates in the automotive dealership industry, selling both passenger vehicles and commercial truck. The company owns and operates automotive franchises, with 72 dealership locations across the country. In addition to vehicle sales, the company generates a meaningful portion of its revenue and earnings through the service, spare parts, and finance divisions.

AP Eagers operates in the automotive dealership industry, selling both passenger vehicles and commercial truck. The company owns and operates automotive franchises, with 72 dealership locations across the country. In addition to vehicle sales, the company generates a meaningful portion of its revenue and earnings through the service, spare parts, and finance divisions.