Automotive Holdings Group remains undervalued despite a forecast fall in car sales linked to a dip in property prices, which is eroding sentiment and forcing consumers to put off buying big-ticket items.

Morningstar analyst Daniel Ragonese has trimmed the fair value estimate of Automotive Holdings Group (ASX: AHG) from $3.30 to $2.80, citing weaker sales volumes.

But he says the company, which operates an automotive network selling passenger cars and commercial trucks, still offers value in the medium term.

At 3pm, AHG was trading at $1.90, a 32 per cent discount to FVE.

"Despite our lower valuation, we believe the stock has been oversold and is offering an attractive yield and considerable upside at the current share price," Ragonese says.

automotive holdings group cars dealerships

AHG operates an automotive network selling passenger cars and commercial trucks

But the immediate outlook is less positive, he says, and it's tied to property prices, which have fallen because of the banking royal commission, which has in turn led to tighter lending standards and rising borrowing costs.

In Sydney, property prices have fallen 7.4 per cent over the year, according to CoreLogic data, the largest annual decline since 1990, as credit curbs intended to slow investor buying also hit first-home buyers.

The net effect is that people feel less well off, Ragonese says, and are opting to delay large discretionary purchases such as cars.

New vehicle sales volumes have fallen by 5 per cent per month (on average) during the past three months, compared with the prior corresponding period.

"Given the backdrop of falling property prices, rising borrowing costs and soft wages growth, we expect the weak volumes to linger for the next two years," Ragonese says.

But there are reasons to be positive. Ragonese is confident sales will rebound in the medium term, and does not expect a major change in long-term vehicle ownership rates, or the average vehicle age, which has been stable at 10 years for the past decade.

"At some point, these vehicles will need to be replaced and we expect an acceleration of vehicle sales in the outer years of our explicit forecast," Ragonese says.

He expects the number of vehicles sold on a per capita basis to fall by about 5 per cent to 42 vehicles per 1000 by fiscal 2020 - from 48 in fiscal 2018.

However, this should rebound to about 47 vehicles by fiscal 2023, broadly in line with the long-run average of the past 15 years.

"Over the long run, this translates to around 1 to 2 per cent growth in the number of new vehicles sold per year, broadly line with population growth."

Ragonese's fair value estimate for Automotive Holdings Group implies a forward price/earnings multiple of 15 times, enterprise value/EBITDA of 8, and a dividend yield of 5 per cent.

As a general guideline, an EV/EBITDA value below 10 is commonly interpreted as healthy and above average.

Automotive Holdings Group at a glance:

Bulls say:

  • Automotive Holdings benefits from Australia’s robust economic conditions and low interest rates, which boost consumer demand for new cars and allow better floor financing rates
  • The company is well placed to benefit from consolidation in the car dealership industry
  • Likely to benefit from shorter vehicle life cycles as newer technology stimulates demand

Bears say:

  • Tough economic conditions (particularly lower demand in WA) can reduce turnover. Higher petrol prices and increased excise on petrol, lifestyle factors and depreciation of the dollar are other factors
  • Changes to government legislation particularly taxation, can hurt new-vehicle demand from business, fleet buyers and the public
  • The ongoing review of finance and insurance commissions is likely to create earnings pressure

 

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Lex Hall is content editor, Morningstar Australia

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