Eagers Automotive Earnings: Order Backlog Underpins Strong Sales and Margins

We raise our fair value estimate for narrow-moat Eagers Automotive APE 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.

Eagers’ interim 2023 result was strong, sales were up 14% to AUD 4.8 billion versus the previous corresponding period, or pcp. This sees Eagers ahead of schedule to meet its AUD 1 billion full-year sales growth target, and we accordingly upgrade our calendar 2023 revenue forecast to AUD 9.5 billion from AUD 9.4 billion. Although rising interest rates and cost-of-living pressures have dampened other big-ticket discretionary spending categories, such as furniture and electronics, vehicle sales remained buoyant. This reflects the order backlog from the pandemic, with supply chain disruptions and chip shortages crunching vehicle imports. Supply and demand are balancing, and sales growth is cooling. Of Eagers’ AUD 600 million first-half sales growth, 40% was from acquisitions, 50% from greenfield investment, and only 10% from existing stores. Moreover, like-for-like delivery volumes were marginally down. But the order bank remains elevated, albeit slightly lower than the end of 2022. This means discounting is not yet necessary, and price growth should more than offset normalizing volume growth in calendar 2023.