Firing on all cylinders

PORTFOLIO POINT: Delivering a 7% fully franked yield, Automotive Holdings offers good value with excellent growth prospects.

What do you get when you cross Australia’s largest car dealership network with a market leading refrigerated transport and cold storage business?

You get Automotive Holdings Group (ASX:AHE), a $600 million-plus market capitalisation stock that is almost singlehandedly responsible for putting more rubber on Australian roads than just about any other business in the country.

Whilst primarily considered a specialist car retailer (presently approximately two thirds of its earnings base), AHE also operates a complementary, and rapidly emerging, logistics business that some analysts are forecasting has the potential to be just as valuable as the auto retailing operation.

I have been a long-time admirer and investor in AHE for its strong management team, consistent track record of growth and the opportunity presented by the ongoing expansion of its already impressive logistics business.

AHE has come a long way since its humble beginnings in 1952 as a Perth-based Holden dealer. Now, through its network of 124 dealerships Australia-wide, AHE is the market leading automotive retailer capturing more than 5% of the highly fragmented national new cars sales market (current turnover approximately 1,050,000 vehicles annually).

With its well-established WA heartland (47 dealerships) and an already strong presence in Queensland (38), AHE has the opportunity to expand into the high-population states of NSW and Victoria from its current relatively low dealership presence. This is where I expect most activity from AHE in the coming years, as characterised by recent investments in Castle Hill (Sydney) and the acquisition of the Jeff Wignall Group of nine dealerships on Victoria’s Mornington Peninsula. Indeed, AHE announced just last week the acquisition of the well-known brand, Coffey Ford, in suburban south east Melbourne (another three dealerships).

And, like any good car salesman, AHE makes a compelling argument as to why now is a “good time to buy a new vehicle”, adding weight to the case that car sales will continue to hold above the currently projected 1,000,000 units annual level.

AHE says car affordability is at its best level in decades and points to the cost of a base level Commodore or Falcon currently being just 30 weeks wages (and down from 32 weeks only 18 months ago). Add to this factors such as improving fuel economy, attractive car financing rates, the relatively strong Australian dollar and fixed-price service offerings reducing new car ownership costs, and the outlook for new car sales is more than sound.

This upbeat outlook was underlined earlier this month when the Federal Chamber of Automotive Industries released data showing a record 96,000 vehicles were sold in May. This was up some 24% on 2011 levels (although the comparative data was impacted by supply problems following the Japanese tsunami and the Thai floods of early 2011).

The logistics business, whilst complementary to the auto business in many respects, is also an extremely impressive operation in its own right. This is perhaps best illustrated through its EBITDA margins of 7%-plus (vis-a-vis the slimmer auto margins which are around 3%-3.5%).

The logistics business comprises:
Transport and Cold Storage – The Rand Transport business contributes approximately two-thirds of the logistics division EBITDA, with key assets being cold storage, distribution and transport facilities operated in Perth and the recently upgraded sites in Melbourne and Brisbane. Harris Refrigerated Transport was acquired in 2011, adding further scale and capability to the group’s already impressive trans-continental and east coast networks (including Sydney and Adelaide).

AMCAP – An automotive parts warehousing and distribution business servicing car dealers Australia-wide. WA focussed auto parts distribution business, Covs was acquired in 2011, further adding to the scale and capability of AMCAP. The business also leverages its network by distributing “non auto” industrial and mining equipment.

VSE and GTB – The Vehicle Storage & Engineering (VSE) and Genuine Truck Bodies (GTB) operation is a Melbourne-based one-stop-shop for truck dealers. It offers truck storage and distribution solutions as well as manufacturing, engineering and modification capabilities.

For good measure, the logistics business is also the exclusive Australian and New Zealand importer and distributor of KTM sports motorcycles (70 dealerships). This business has been a strong performer in FY 2012 and has a good growth outlook.

The logistics business is expected to see further upside in FY 2013 when the Covs and Harris acquisitions deliver full-year contributions to the division and the revenue/cost synergies from these acquisitions begin to filter through to the bottom line.

AHE recently enhanced its capacity for further accretive acquisitions, across the auto or logistics divisions, when it announced the intended sale and lease back of dealership properties in Perth and Sydney, which will release some $60 million of cash. Whilst yet to complete, this transaction will position AHE for ongoing growth with minimal debt outside its floor plan finance obligations.

Current consensus estimates has AHE delivering a 7% fully franked yield on a 10x PE ratio (FY 2012) with 2013 earnings per share growth of 10%-plus. Whilst there may be some minor adjustment required to the FY 2012 numbers for acquisition costs, I believe AHE offers compelling value with excellent growth prospects in its logistics business and ongoing solid returns on offer from its auto retailing business.

Robert Calnon is portfolio manager at OC Funds Management.