I have never understood the fascination with luxury cars. If I was a squillionaire I might have a garage full of them, but the rational economist (scrooge) in me feels that paying tens of thousands of dollars for a luxury European car brand is unnecessary.
Also, my parents brainwashed me about buying a reliable car that gets from point A to B. “Don’t waste money on fancy cars,” they said. “Put the money into an asset that appreciates rather than loses part of its value the minute you buy it.” It was boring, sensible advice.
Clearly I am in the minority with car frugality. Luxury car sales have boomed in Australia, peaking at 130,000 vehicles or just over a tenth of all car sales. New models, record-low interest rates and cheaper versions of luxury cars have stimulated sales.
Luxury car sales took a hit towards the end of 2017 but it’s too soon to know if the sector’s spectacular run is over. My hunch is there was consumer fatigue in luxury car demand after six years of record growth and amid general consumer gloom in the fourth quarter of last year.
This is a critical trend for car dealers, such as ASX-listed Autosports Group, which specialises in luxury cars. If we are seeing a pronounced downtrend in luxury car sales, it’s not fully apparent in Autosports’ recent half-year earnings report.
Conditions for luxury car sales remain favourable: house prices on the East Coast are easing back rather than tumbling as many bears predicted; global equities markets are rallying again; interest rates remain low; and business and consumer sentiment are improving.
A strengthening Australian economy should help luxury car sales in the next 12 months, or at least limit falls in growth. The influx of migrants, some of whom see luxury cars as an important status symbol, is another important long-term driver of industry growth.
Much depends on house prices. When people see the value of their home rising and have million(s) of equity in it, the temptation to have a luxury car in the garage increases.
I’ve lost count of the number of families in our suburb who have the same consumption patterns: they buy the family home, renovate it, put two kids in private schools and buy a Volvo or BMW to ferry them around. The luxury car goes hand in hand with the luxury house.
Autosports listed in November 2016 through a $159-million initial public offering (IPO). Its $2.40 issued shares have weakened since listing and now trade at $1.99. I first wrote about Autosports for The Bull in early 2017 at $2.50, so am underwater on this idea.
It’s hard to see any fundamental reason for Autosports to lose a quarter of its value, other than nervousness about a slowdown in luxury car sales growth. To my thinking, recent price falls should put Autosports on the radar for value investors comfortable with small-cap stocks.
Autosports’ recent half-year report was solid. Revenue rose 22 per cent in a challenging car market, driven largely by acquisitions (like-for-like revenue growth was 1 per cent). Underlying earnings rose almost 10 per cent to $27 million, broadly in line with market expectation.
Autosports appeals on three fronts. First, it is well placed to consolidate Australia’s fragmented market in luxury car dealerships. It operates 35 of approximately 540 new prestige or luxury car dealerships on Australia’s east coast, so has room to grow. Its recent acquisition of Canterbury BMW in New South Wales looks a good move.
Second, Autosports has plenty of scope to add more back-end services: car maintenance, panel repair, finance, insurance and so on. These services diversify revenue, provide recurring income and help maintain overall profit margins, which is important as margins on “front-end” car sales fall because of intense competition.
Luxury car owners, particularly those who drive their vehicle a lot, know the costly pain of regular servicing. Buying car is one thing; servicing it throughout its life is another as car owners rack up tens of thousands of dollars in maintenance bills.
Autosport’s third attraction is valuation. At $1.99 it trades on a forward price-earnings (PE) multiple of just over 10 times on Macquarie’s numbers. That’s a significant discount to its larger car dealership peers, who are struggling with growth.
Macquarie, an adviser to the Autosports IPO, has 12-month target of $2.75 and argues the market under-appreciates the strength of its dealerships, growth prospects and the resilience of its increasingly diversified operating model.
It would not surprise if Autosports weakened or drifted sideways in the next few months as the market looks for signs that the car market is not deteriorating further. Nobody doubts the new car market has become more challenging, but Autosports has shown it can grow in tougher conditions as it buys dealerships and expands it back-end service.
Chart 1: Autosports GroupSource: 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. It has been prepared without considering your objectives, financial situation or needs. Before acting on 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 March 1, 2018.