-Strong earnings trajectory over 2020
-Tight inventory boosts margins
-Scope for increased sales and cost optimisation
Strengthening new vehicle sales and a tight inventory position have led to a sound finish to 2020 for Eagers Automotive ((APE)). Customer orders have also started to tick up as supply constraints ease.
Eagers has signalled 2020 pre-tax profit guidance of
Morgans expects the company will emerge with negligible net corporate debt over the next year as property acquisitions replace expensive leases and a structurally higher earnings capacity is unveiled post a
Margins may be boosted by a shortage of inventory stemming from lockdown-constrained OEMs (original equipment manufacturers) but 2020 also incorporates material pandemic-related losses as well as benefits from structural cost reductions.
Additionally, new car volumes nationally in 2020 were -20% below "normal". The stock may have re-rated strongly to date but Morgans envisages further upside amid continued earnings momentum.
By 2025 UBS assesses an opportunity to reduce the dealership network by more than -30% and costs by -21%. Factoring in a 4% long-term operating earnings (EBITDA) margin
Moelis envisages numerous avenues for growth, including structural aspects such as higher car ownership as a result of the pandemic and further rationalisation of the company's property. The potential for the government to ease responsible lending obligations could also assist the new vehicle sales market,
Cyclical/Structural?
Fixed-price used cars present an opportunity, as well as network optimisation as property costs are reduced. There is also the company's goal of finance penetration over the long-term of 80% compared with the 40% currently experienced.
Moreover, reduced supply because of limited OEM capability implies sustainably higher margins and
Margins
A strong boost to margins usually occurs when inventory conditions are tight and this has resulted from the constraints at OEMs that shut down during the pandemic. Therefore, incorporating all aspects of the update, Morgans does not believe the business has over-earned and expects an incremental
The return to growth in official new vehicle sales in November relates just to vehicles that have been delivered,
The market may be wary of capitalising excessive margins but
Lower retail discounts also meant better margins for dealerships Moelis adds, although suspects margins will probably return to historical levels by the second half of 2021.
Daimler Divestment
Earnings from trucks are more volatile and the divestment means
Moelis, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and
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