While it's difficult to predict how long current strong conditions will prevail for
-Car shortages to persist in the medium term
-Potential uplift from EasyAuto123 strategy
-Strong M&A rhetoric by management at
The year-long share price ascent of
In last week's AGM trading update, management revealed
After taking into account that January to April is seasonally weaker for the group and for the industry, extrapolation of the run-rate suggests full year profit of
The company's forward order book continues to grow as demand continues to outstrip supply by roughly 25%. Significant promotional activity normally occurs in May and June and along with EOFY tax incentives Moelis expects a stronger second quarter compared to the first.
The Daimler Truck sale and associated property completed in April and the
Margins
Despite no signs as yet of conditions moderating, Moelis adopts a conservative stance by assuming gross profit margins moderate in the second half.
The company managed to extract -
Both consensus and Morgans currently forecast that FY22 profit will fall materially when compared to FY21. This is on the assumption that margins normalise as supply constraints ease. Should the strategies mentioned in the next section play out, there could be upside to these forecasts. In addition, there is the potential for accretive M&A.
Other Tailwinds
Aside from prevailing industry conditions (shortage of supply), Morgans believes earnings momentum may arise from a number of sources. These include the above-mentioned structural removal of -
The shortage in new car supply has also pushed up the price of used cars, benefiting the company's used car business EasyAuto123. Chief Executive
In a note preceding the trading update, UBS also highlighted the strongest April new car sales data on record and ongoing supply issues driven by global semiconductor chip shortages. As a result, the broker expected a continuation of buoyant conditions from the first half of FY21 to the end of calendar 2021.
Even without the chip troubles,
The company then anticipated car shortages to persist in the medium term, with an around -20-25% reduction in global car units supply following covid-related cost-reduction measures. Supply was also being impacted by disrupted auto parts chains and OEM's deciding where to send capacity.
Outlook
With demand continuing to materially outstrip supply, combined with the extension of the instant asset tax write-off, Moelis sees no signs of demand subsiding. After the result, the analyst upgrades FY21 EPS forecasts by 8% and retains a Buy rating with a
The broker estimates demand continues to outstrip supply by approximately 25% and so the company's forward order book continues to grow. Significant promotional activity normally occurs in May and June and along with EOFY tax incentives a strong second quarter is expected.
Over the medium term, Morgans still thinks the group looks well placed with further operational improvements, capital recycling and M&A expected to assist profitability. The broker lifts FY21-23 EPS forecasts by 9%, 2.1% and 2%, respectively, and lifts the target price to
Mergers and Acquisitions
With regard to M&A, management noted the group was "extremely well capitalised" (
This is the first time since pre-covid that Morgans heard strong rhetoric in relation to M&A. This is considered an important point given the company's successful track record in this area. Additionally, there is potential for acquisitions to assist in bridging any potential gap, when industry margins ultimately partly normalise, as supply constraints ease.
Summary
Moelis, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and
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