Eagers Automotive: Expanding Their Presence in Victoria

We raise our fair value estimate for shares in Eagers Automotive APE 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.

Earnings detail is scant but the AUD 245 million purchase price appears relatively attractive. The acquisition adds about AUD 1 billion to sales—about 10% of Eagers’ revenue. However, the AUD 245 million purchase price is only about 7% of Eagers’ enterprise value, with a similar proportion of property owned versus leased compared with the rest of Eagers’ portfolio. It’s also more attractive than the ACT dealerships Eagers acquired from Politis for AUD 205 million in 2022, which generated about AUD 450 million in sales at the time—although properties were purchased for 10 of the 13 dealerships in this transaction.

We expect profitability in the acquired businesses are probably not as attractive as the rest of the Eagers’ portfolio but they can be improved over the coming years as the businesses are integrated. Following the acquisition, we estimate Eagers would boast a market share of about 12%. As the largest dealer in Australia, we think Eagers is in a relatively stronger bargaining position with manufacturers and floor plan financiers. Eagers can also strip out back-office operations and fractionalize fixed costs over a significantly larger volume and revenue base, affording a cost advantage over smaller peers—underpinning its narrow economic moat.