Lockdowns help steer auto businesses to a bumper year
FY21 was a great year for companies in the automotive industry. With overseas travel ruled out, we took to the roads. And recent results announcements from Motorcycle Holdings and Apollo Tourism & Leisure indicate that the good times could continue into 2022, even though Peter Warren Automotive is less optimistic.
Motorcycle Holdings (ASX: MTO)
Following a number of years of challenging trading conditions, Motorcycle Holdings (MTO) reported the benefits of a “heightened demand for recreation and leisure products”, restricted supply chains and the consequent higher sale prices for both new and used motorcycles.
Revenue was up 19 per cent to $433.9 million, and ‘underlying’ EBITDA at the upper end of guidance, up over 61 per cent to just under $45 million. NPAT was up 86 per cent to $28.3 million. The company also enters FY22 with a strong balance sheet revealing zero net debt and positioning it for acquisitions, which in the past have been received favourably by the market.
All divisions of the business improved. In sales, new motorcycles were up 32 per cent to $170.9 million, used sales were up eight per cent to $102.5 million. Importantly used motorcycle margins are the highest they have ever been, and in the second half of the financial year, the company elected to ramp up its stock of used motorcycles. Accessories sales – were up 14 per cent in retail and 16 per cent in wholesale. Servicing and repairs revenue increased 19 per cent to $15.7 million. As we saw previously with Eagers Automotive (formerly AP Eagers) gross profit margins entering FY22 remain high (thanks in part to the strategy of increasing used motorcycle inventory) and the order book is robust.
As an aside, the company expects the unusual margins being experienced to continue for another 12 months at least. Demand remains strong in locations where restrictions aren’t in place and the company is preparing for a wave of sales in response to pent up demand during lockdowns.
Apollo Tourism & Leisure (ASX: ATL)
Apollo is a multi-national company focused on manufacturing, rental, sales and distribution of a range of recreation vehicles, including motorhomes, campervans and caravans.
In August of 2017 we investigated this company, passing on an investment amid concerns surrounding the sustainability of margins when exiting aged ex-rental recreational vehicles, campervans and caravans.
Most investors reject Apollo on a first scan that reveals high debt levels. The debt however is not unlike that provided to car dealers by OEMs. This OEM finance and the other debt is supported by the inventory. Importantly, group debt declined in FY21 by $52.8 million from 30 June 2020, materially reducing repayment commitments and leverage.
The company reported a significantly reduced loss in FY21. Apollo reported a statutory net loss after tax of for FY21 of $17.9 million versus a $61.2 million loss in FY20. COVID-19 continued to materially impact the rental business throughout FY21. However, strong RV sales margins were recorded as orders exceeded supply capacity globally.
The company conveniently offered the following observations for its geographic segments:
- High vaccination rates in Europe and Canada has allowed for easing of some travel restrictions.
- Increasing vaccination rates now the primary focus of Australian Federal and State Governments and New Zealand Government.
- Each region has opportunities and challenges:
- Australia: large pool of potential domestic customers/threat of interstate border closures and snap lockdowns.
- New Zealand: strong appeal for travel/small population and temporary closure of Trans-Tasman bubble.
- Canada: large pool of potential domestic customers and reduced competition / constrained by seasonality.
- Europe/UK: existing guest profile largely in-market/constrained by fleet supply and seasonality.
- Reduced cost base will allow for improved margin profile post-COVID-19.
- Fleet numbers will be replenished relative to rising demand and subject to OEMs meeting vehicle delivery timeframes which have been impacted by supply chain issues.
- Fleet purchases will be funded using the existing headroom in fleet financing facilities and additional headroom generated through fleet sales and principal payments.
- Apollo’s Brisbane manufacturing facility will continue to scale up production output in response to demand, subject to supply chain issues being alleviated.
Apollo is arguably most leveraged to a reopening of both domestic and international borders. Unable to travel overseas many Australian’s are opting to do the ‘lap of honour’ around Australia. Globally, the experience is the same. At the end of previous lockdowns rental demand surged.
By way of example, one of Sydney’s largest RV dealers, Sydney RV Group has just 12 used vehicles listed for sale attesting to the booming market. A new buyer vehicle can expect to wait 10- to 12 months for RVs and 3- to 5 months for a caravan. RV and caravan sales are reportedly achieving global records. Apollo’s forward order book of $90 million is four times higher than normal.
Peter Warren Automotive (ASX: PWR)
The company’s prospectus forecast a FY21 profit before tax of $45 million. The company subsequently upgraded its guidance to $54-$57 million. The final result came in 68 per cent higher than prospectus at A$75.7 million.
Revenue was six per cent higher than prospectus forecasts at $1,621 million. EBITDA grew 42 per cent on the previous corresponding period to $108 million, and NPAT was up 66 per cent on the previous corresponding period at $52 million.
Unlike Eagers Automotive – a company heavily weighted to dealerships in Queensland and WA – Peter Warren offered a more conservative outlook. Lockdowns in NSW most certainly impacted management confidence who reiterated conservative 1H22 prospectus forecasts. I say conservative because management might be neophytes in the listed space and if the company were to meet its prospectus forecast for 1H22 of $28 million, it would represent a 43 per cent contraction from the immediately preceding half. Like MTO, PWR enjoys a solid new vehicle order bank.
Since the IPO the company has commenced making acquisitions and with net cash of $43 million there is ample scope to continue. With lockdowns persistent, in NSW particularly, first half 2022 conditions remain adversely impacted. But as we learned from the Carsales.com annual report, challenges the industry is experiencing related to supply and sales are being offset by a boom in used car sales, with Australians paying nearly 50 per cent more for used cars than before the pandemic.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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.
