Inspecting the Car Industry
Automotive Holdings (ASX: AHE) is Australia’s largest automotive retailer and transporter of refrigerated food. While AHE sits outside our investment universe, we enjoy following the company’s performance as management is well placed to comment on the health of the domestic car industry (which has implications for the broader economy). In our latest discussion at the full year results, management noted three key pressures that the company is closely monitoring.
First, AHE considers that the bubble in Western Australia that was driven by the mining sector has burst. AHE has not been too badly affected by this slowdown, as management made sure to not expose the company to one major seller. Car rental companies though are being hurt, with many of the major miners reportedly returning entire fleets.
In addition, management noted that the workforce in Western Australia is transient, with many flying in and out from the eastern states. If conditions continue to slow, management expect that demand will shift from the western states to the eastern states.
Second, Ford’s announcement to close its Australian manufacturing operations has had a material impact on the sector. Ford has a strong pipeline of new models which are expected to sell well in coming years, so resellers like AHE will not be too badly affected. But management was less optimistic about Ford’s timeline to close its manufacturing division, and believe that they will be forced to close their doors before 2016.
The third pressure is the uncertainty that has been created from the Government’s proposed changes to the Fringe Benefits Tax. The Government announced in July that it will remove the tax breaks that are associated with the personal use of a car under a novated lease. We have written a number of in depth blogs about this issue and its impact on McMillan Shakespeare.
Novated leases comprise a very small proportion of AHE’s sales, so the impact on the business will be minor if the proposed changes are implemented. But management did note that sales have been impacted in the lead up to the election. Management estimate that around 70 per cent of novated leases are used by government employees, and it appears that these workers have been holding off on making purchases until the election brings certainty about their positions.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
INVEST WITH MONTGOMERY
Darryl Whiteside
:
Still learning and reading.what are your view’s on sxy.
Colin Petersen
:
Hi Ben, a query: when you say that AHE exists outside your universe do you meant that the Montgomery Funds aren’t currently invested in AHE, or that they will never invest in AHE for some fundamental reason?
Roger Montgomery
:
There will be a quality/value/prospects characteristic that puts a company outside the universe for as long as that remains the case.