I have never understood why Australia has so many car dealerships. There are almost 6,000 new and used-car dealerships, according to business forecaster IBISWorld. Many are independently owned.
One dealership near me has a huge showroom in a prime location. And more space again from a mechanic shop out the back and second-hand car yard. A car dealership a few doors down has a similar amount of space and never looks that busy. Rents must be huge.
Combining car dealerships, developing a stronger capability to buy cars online and developing new models for car-servicing makes sense. With city property at a premium, surely it makes sense to have fewer space-hogging car dealerships. The land alone would be worth a fortune in property redevelopments.
It’s no surprise that many companies are trying to consolidate Australia’s fragmented car dealership industry, raise capital and list on ASX.
Queensland’s Kern Group has reportedly invested in a New Zealand-led roll-up of car dealerships with a view to list on ASX in 2018. Quadrant Private Equity is using the Peter Warren Automotive Group for an industry roll-up in New South Wales and Queensland. The business looks like a future IPO candidate, but no plans have been made.
These and other canny investors see the opportunity to buy independently owned car dealerships that are finding it harder to compete on margins. Profits are under pressure after a regulatory crackdown on add-on products, such as insurance sold by dealers.
AP Eagers and Automotive Holdings are Australia’s best-known car dealership stocks: both have struggled this year.
Presumably, there are plenty of baby-boomer owners of car dealerships eager to sell out to a larger organisation and cash in on rising competition in the sector.
Autosports Group, owner of three dozen new or used luxury car dealerships, listed in November 2016 through a $159 million Initial Public Offering (IPO). I wrote favourably about Autosports for The Bull in April 2017 at $2.50 a share (its stock was issued at $2.40).
Autosports rallied to $2.66, then eased to $2.30. Nothing has changed in my view on the company as an interesting consolidation of luxury car retailers in Australia and on its ability to expand revenue by the full lifecycle of a luxury vehicle.
Chart 1: Autosports GroupSource: The Bull
It’s hard to find a clear reason for Autosports to languish below its issue price.
I suspect the company’s share price is suffering from downgraded profit forecasts at its two big listed car-dealership rivals and from broader market concerns about retailing. Fears about tighter banking lending standards on new-car finance might be weighing on the sector.
This is not reflected yet in Autosports’ performance. The company exceeded prospectus forecasts in its maiden result as a listed company for FY17. Pro forma before-tax net profit rose 45 per cent on a year earlier, and the first dividend was paid. Luxury car sales have good long-term prospects, although investors should keep an eye on any pauses in quarterly sales.
My preferred play in the automotive consolidators is Motorcycle Holdings. The company listed on ASX through a $46 million float in April 2016 at $2 a share and now trades at $4.88. It’s been one of the best floats in years and a rare star retailer.
Motorcycle Holdings, established for almost three decades, is Australia’s largest motorcycle dealership with 27 outlets.
Record sales growth in FY17 underpinned 16 per cent growth in profit to $9.3 million.
I like Motorcycle Holdings’ prospects to consolidate a fragmented dealership market through acquisitions and organic growth. It bought three dealerships in FY17 and funded them from existing cash instead of debt or equity capital raisings. The company completed the acquisition of Cassons, a leading wholesaler and retailer of motorcycle accessories and parts, last month.
Motorcycle Holdings can become more entrenched in the total motorbike purchase process. It sells new bikes, used bikes, accessories and parts, provides servicing and repairs, and offers finance, warranties and insurance. More touchpoints increase “switching costs” when customers consider moving to rivals and make it hard for online competitors.
Valuation is the main concern, particularly after strong recent gains. Motorcycle Holdings traded on a trailing PE of almost 20 times. That’s high for a newly listed micro-cap.
However, the company’s performance since listing and outlook warrant a premium. Motorcycle Holdings due for a short-term share-price pause or pullback, has a bigger opportunity than most comparable automotive retailers and is less affected by online retailing.
Australia’s only motorcycle retailing play has so far zoomed past its car dealership rivals – a gap that could be maintained for some time given less competition in the motorbike segment. As an aside, Motorcycle Holdings could be a neat fit with a big car dealership in coming years.
Chart 2: Motorcycle HoldingsSource: The Bull
• Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor 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 the appropriateness and accuracy of the information, regarding your objectives, financial situation and needs. Do further research of your own and/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 October 31, 2017.