I was late for a meeting this week when a 15-minute car trip took almost an hour because of traffic chaos. Although horrible for commuters, traffic congestion is good news for providers of car products and services, including panel beaters.
One expects traffic gridlock on freeways just after 5pm or during the school pick-up rush. Or when accidents shut down lanes. But this was early afternoon in the suburbs and there was no sign of a crash. It was simply too many cars for the available roads.
Traffic congestion will surely worsen as populations of Sydney and Melbourne soar to an expected 8 million within three decades or so. Infrastructure development has lagged and new projects will barely keep up with population growth and transport demand.
It’s a no-brainer that the number of cars on our roads will rise sharply in the next decade, travel times will lengthen and cars will have to be serviced more often because of extra mileage. More cars also mean more bad driving, road rage and collisions.
You can see this trend unfolding. People stuck in the daily commute for longer each day, more drivers taking risks to shorten travel times and the greater potential for accidents. I feel for people who lose 2-3 hour each day stuck in horrendous traffic gridlock.
Yes, cars are much better made these days and new technology is reducing collision risks. Self-driving vehicles will vastly lower accident rates but they are a long way off. For now, more cars and congestion mean greater demand for collision repairs.
I have written on urbanisation, one of my favoured megatrends, several times for The Bull in the past three years. Several stocks offer exposure to this trend; listed property trust National Storage REIT is a potential winner from urbanisation as people who live in smaller apartments rent storage space.
Urbanisation and its effect on car volumes and travel times underpinned my favourable view on Bapcor for The Bull. The car-parts provider is a beneficiary of more cars on the road and greater wear and tear as travel times increase. Bapcor has almost tripled since 2014.
ASX-listed panel beater AMA Group is another way to play the urbanisation/car theme. I covered AMA for The Bull in early 2015 at 38 cents a share. AMA now trades at $1.04.
Chart 1: AMA GroupSource: The Bull
To recap, AMA operates a chain of collision-repair centres and service workshops for brakes and transmissions. It also makes and distributes some automotive products.
The vehicle panel-repair division accounts for about 85 per cent of AMA’s revenue. It operates under eight collision-repair brands that cover 79 sites across Australia.
The panel-beating industry is highly fragmented: lots of small operators with limited economies of scale. AMA saw an opportunity to consolidate the industry through acquisitions and organic growth and its strategy has barely missed a beat.
I’m usually wary of industry “roll-up” stocks. So many over the years have loaded up on debt or issued equity like confetti to fund acquisition sprees. Early gains captured market attention but unsustainable growth inevitably killed the business.
AMA looks an exception. The panel-beating industry is an obvious candidate for consolidation: it makes little sense to have so many tiny operators around Australia. Greater scale would help the $7-billion industry become more profitable.
AMA has a solid balance sheet and capacity to quicken its acquisition strategy. The business announced the acquisition of seven vehicle-repair centres in July.
The company’s growth strategy went up a notch with this year’s takeover bid for Automotive Solutions Group (4WD). ASG fell from a $1 issue price to 30 cents after downgrading profits in late April, four months after listing.
AMA secured a 31 per cent stake in ASG, which specialises in 4WD parts and services. ASG looks a good fit for AMA’s custom-alloys business, which focuses on 4WDs, sports-utility vehicles and passenger and commercial vehicles.
An average price target of $1.29, based on the consensus of four broking firms, suggests AMA remains undervalued, despite strong gains over 12 months. Never place too much weight on consensus forecasts based on a limited number of broker forecasts, but suffice to say that most firms that cover AMA belive it is worth more than the current price.
AMA has several growth options: acquire more panel beaters and drive efficiencies; grow organically through new services; and expand the parts design and manufacturing business. All at a time when there will more cars on roads, particularly in high-growth areas such as Western Sydney, and inevitably more collisions.
As a $508-million company, AMA suits experienced investors who are comfortable with the risks of investing in small-cap companies.
• 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 Aug 3, 2017.