AP Eagers: Recognising ST earnings volatility

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
21 January 2020, 4:43 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

  • National new car sales remain under pressure with Nov/Dec aggregate volumes 6.9% (vs -7.3% in Jul-Oct).
  • We have lowered our FY19-FY21 forecasts by 1-2.4%.
  • In the short term, we are also wary of the wide divergence in consensus forecasts (c20% from FY20).
  • APE provides strong leverage to a recovery in car sales when they ultimately turn (as implied in our updated price target), however the potential for further consensus downgrades is a risk we would prefer to get more clarity on. We therefore lower our rating to Hold (Morgans clients can login to view detailed reports and price targets).

Recent VFACTS data shows industry conditions are still tough

VFACTS new vehicle sales for 1H20 were -7.2%, comprising NSW -7%; QLD -6.7%; SA -7.4%; VIC -8%; WA -4.2%. Over Nov/Dec, aggregate car sales were -6.9% (vs -7.3% for the first four months).

In terms of the Nov/Dec performance vs the first four months, QLD (-7.4% vs 6.3%), SA (-16% vs -2%), VIC (-8.2% vs -7.9%) deteriorated, while NSW (-4.2% vs -8.3%) and WA (-1.4% vs -5.5%) improved.

We compare Nov/Dec vs the first four months given APE provided a weaker-than-expected update in early November.

Unlikely to see an earnings recovery over Nov/Dec

At the Nov update, APE noted as a result of continued high-single digit declines in new vehicle sales, underlying NPBT for the core APE operations YTD (10mths) was -6%. APE’s 1H19 result reported NPBT +1.8%, this implies that the July-Oct NPBT decline was >16.5%.

Given the new vehicle sales environment remains challenging, we expect that similar level of NPBT decline has occurred over the remainder of the half (December is a particularly important month).

AHG contributed a A$4.8m NPBT contribution for the first four months, however given the change to equity accounting/full ownership during the 2H, we have assumed ownership only from 1HCY20.

We will be looking closely at the 6-month contribution from AHG at the upcoming result.

Considerable dispersion of consensus estimates from FY20

We forecast underlying core APE FY19 NPBT of A$100m (excludes any AHG income).

In FY20/21, we forecast NPBT of A$162m/A$194m versus consensus of ~A$206m/A$241m (ie we sit c20% below in both years).

The key difference between us and the market is we have taken a more conservative view on the base earnings of the AHG business, in addition to lower base APE forecasts in FY19 (and subsequently in FY21/22).

Move to HOLD rating on short-term earnings uncertainty

Given the material divergence in consensus forecasts, we move to a HOLD recommendation (Morgans clients can login to view detailed reports and price targets).

While we continue to see catalysts on a 2-year view (potential capital management/RL divestment) and acknowledge our PT is +10% higher than the current share price, we are wary of potential consensus earnings risk (and therefore potential share price impact).

Our key identified risks include:

  1. Unsuccessful integration of the AHG acquisition
  2. Inability to extract efficiencies in line with our forecast
  3. Further F&I regulatory risk
  4. Inability to increase Finance contract penetration at dealership point-of-sale
  5. Materially higher interest rates
  6. Deteriorating consumer sentiment/house prices
  7. Inability to divest RL business

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