Who’d have thought Australians would buy more German-made cars than homegrown ones. But that’s what happened last year as consumers favoured Mercedes-Benz, BMWs and Audis over Commodores, Falcons and Camrys.

The impending death of local car manufacturing surely made people think twice about buying locally made brands. But the swing towards luxury cars has been entrenched for several years as Australians become more image conscious about their cars.

There was 11 per cent growth in luxury-branded cars in this market in 2016 compared to 2 per cent growth for the rest of the industry. Mercedes-Benz sales reportedly grew 13 per cent and BMW sales jumped 12 per cent. Sales of upmarket sports utility vehicles (SUVs) underpinned much of the growth.

So much for Australia’s sluggish economy, record-low wages growth and high personal debt levels. Consumers could not get enough of luxury car brands, particularly those who downsized from larger family vehicles to mid-price prestige cars.

Australia’s housing boom is playing its part. Double-digit growth in Sydney and Melbourne property prices has made homeowners there (those not groaning under debt) feel increasingly wealth. So, they buy a prestige car to go with their million-dollar house.

I noticed this trend first-hand in my two previous (rented) houses, both next-door to public schools in an upmarket suburb. The street was lined with prestige vehicles at school pick-up time. Volvo SUVs were especially popular with parents ferrying kids to and from school. At times, the street resembled a prestige car lot. 

It’s hard to see that luxury car trend ending abruptly as house prices stay high, interest rates remain low and prestige car retailers offer lower price entry points for consumers. Some well-known German brands now have models that sell for less than $40,000.

This brings me to Autosports Group, owner of 35 new or used luxury car dealerships. Autosports listed in November 2016 through a $159 million IPO. Its $2.40 issued shares fell to $2.25 after listing, then recovered to $2.50 after a solid half-year earnings result.

Chart 1: Autosports Group  

Source: The Bull

Autosports’ strategy is based on servicing the full lifecycle of a luxury vehicle. The company sells the new car, offers a range of finance and insurance products, provides aftermarket parts and servicing, and its used-car dealerships sell vehicles as people trade up.

It’s a great business model when it works. Autosports gets upfront revenue when it sells the car  and recurring revenue along the way as pricey parts or services are consumed. Then benefits as customers upgrade to their next luxury car and sell their existing one. 

The first-half FY17 result, slightly ahead of broker forecasts, suggested Autosports was on track to meet prospectus forecasts. A stronger performance from its used-car dealerships and back-end operations (car services, parts and panels) underpinned slightly higher-than-expected profit margins.

Longer term, Autosports has good prospects as it grows through acquisition and organically. The company has expanded from eight facilities in FY14 to 35 today, successfully opening dealerships in key upmarket locations and or acquiring others. 

The car dealership industry remains highly fragmented. Autosports’ prospectus noted estimates of 2,500 new motor-vehicle dealerships nationwide. Macquarie Group estimates there are 540 prestige and luxury dealerships on Australia’s east coast.

Consolidating more of these dealerships into a large national network, such as Autosports, creates synergies. As does creating scale in luxury car brands across Australia; for example, Autosports owning more Audi dealerships, one of its key revenue drivers.

Organic growth will come from opening more dealerships in Sydney, Melbourne and Brisbane and adding other luxury car brands to the Autosports stable. Most of the company’s revenue is from selling and servicing Audis, Volvos, Mazdas and Volkswagens. 

As Autosports grows, it should attract dealership agreements with other prestige and luxury car manufacturers and strengthen its existing industry relationships.

The potential is more Autosports car dealerships offering a wider range of luxury brands and service to a larger customer base. With that comes extra revenue opportunities as consumers pay more to maintain their cars and upgrade them with greater frequency.

Autosports’ prospectus had the forecast FY17 Price Earnings (PE) multiple at 17.2 times, based on the $2.40 issue price. The few broking firms that cover Autosports have target prices at or just above $3, suggesting decent upside from the current $2.50. 

My interest is the trend of growth in luxury car sales and Autosports’ potential to consolidate a fragmented industry and drive faster earnings growth. Autosports has not put a foot wrong since listing and looks like a solid company with a good industry position.

Granted, it’s early days and Autosports, capitalised at $502 million, suits investors who are comfortable with small-cap stocks and higher risk. 

But there’s a lot to like about Autosports’ long-term potential as more Australians trade up to luxury cars, swapping their Commodores for offshore-made SUVs – something unthinkable a decade ago.

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Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at April 19, 2017.