Eagers’ Earnings Resilient While Consumers Are

We maintain our AUD 11.00 fair value estimate for shares in narrow-moat Eagers Automotive APE 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%.

Management expects the considerable order bank growth of 74% in 2022 to support gross profits over an extended runoff period. And Eagers hasn’t seen car demand drop off yet in 2023. The gap between the vehicles ordered and delivered has widened to 34% in January 2023, after dropping to about 24% in the December 2022 quarter. Management expects revenue of AUD 9.5 billion to AUD 10.0 billion in 2023, at its midpoint up 15% on 2022. The board lifted ordinary shares by over 30%, excluding 2021′s special dividend, indicating it shares management’s “great optimism.” It declared a final fully franked DPS of AUD 0.49 bringing total 2022 distribution to AUD 0.71 per share.

We lift our fiscal 2023 revenue forecast by 5% to AUD 9.4 billion, near the bottom of management guidance, and our NPAT forecast by 7% to AUD 256 million. However, we maintain our more cautious view on trading conditions, and our longer-term forecasts are largely intact. We expect elevated demand and constrained supply to ease over time. With increased vehicle supplies to the Australian market looming, we expect competition among car retailers to return, necessitating a return to discounting on new car sales and some normalization in personnel expenses for Eagers—namely in sales and marketing as a percentage of revenue. We expect operating margins to diminish accordingly.