Automotive Holdings Group - bwts.com.au · It provides services vital to the management of today’s increasingly complex supply chain in terms of sales and marketing, inventory management,

Copyright © Colin Nicholson Page 1

Stock Journal

Automotive Holdings Group

Important I am publishing stock investment journals of stocks I own (or consider owning, but decide against doing so) only to provide examples to teach the way I think about investing. In doing so, I am neither making nor implying any recommendation for anyone to invest in this or any other stock.

Therefore, the stock discussed in this journal may not be a suitable investment for you at this or any other time. I will only be discussing its suitability, or otherwise, for my investment plan.

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Understanding the Business

Company Profile

Scope of Operations Automotive Holdings Group is a diversified automotive retail and logistics group with operations in every Australian mainland state and in New Zealand. The Company operates its automotive retailer business in Australia through its subsidiaries, with operations in Western Australia, New South Wales, Queensland and Victoria.

Automotive Retail AHG’s automotive retail business model and strategy is to leverage the talent of its employees to:

• Enhance the customer experience • Sell new and used vehicles • Arrange related financing, vehicle service and insurance contracts • Provide maintenance and repair services; and • Sell replacement parts

via an expanding network of franchised dealerships located in both established and growing regions of the Australian mainland and New Zealand. The business has passenger vehicle and bus and truck dealership operations in Queensland, New South Wales, Victoria and Western Australia, and passenger vehicle dealerships in New Zealand. The Group represents 23 passenger vehicle manufacturers and nine commercial vehicle and truck makers:

Passenger brands: Alfa Romeo, Bentley, Chrysler, Citroen, Dodge, Fiat, Ford, FPV, Great Wall, Holden, HSV, Hyundai, Jeep, Kia, Mazda, Mitsubishi, Nissan, Peugeot, Porsche, Subaru, Suzuki, Toyota, Volkswagen.

Truck and commercial vehicle brands: Fiat Professional, Freightliner, Fuso, Higer, Hino, Iveco, JAC, LDV, Mercedes-Benz, Rosa, Volkswagen Commercial.


Automotive Holdings Group demonstrates strength in the diversity of it income streams generated from automotive retailing, including the sale of new and used vehicles, finance, insurance, aftermarket products and services, vehicle servicing and parts.

As at 19 August 2014, Automotive Holdings Group announced that it has completed the acquisition of the Bradstreet Motor Group, which comprises 13 automotive franchises at seven locations in and around Newcastle, New South Wales and represents seven manufacturers - Toyota, Mazda, Holden, Nissan, Kia, Subaru and Great Wall.

On 31 March 2014, Automotive Holding Group announced that it has reached agreements to acquire the Leo Muller CJD (Chrysler, Jeep, Dodge, Alfa Romeo and Fiat) dealership at Aspley in Brisbane and the Paceway Mitsubishi dealership at Osborne Park in Perth. The acquisitions, in separate transactions, involve a total consideration of approximately $5 million for goodwill and assets. Logistics Automotive Holdings Group operates logistics businesses throughout Australia:

The Refrigerated Logistics Division operates through:

• Rand Transport • Harris Refrigerated Transport • Scott's Refrigerated Freightways (SRF) • JAT Refrigerated Road Services (transport and cold storage)

In combination with Automotive Holdings Group’s existing Rand and Harris operations, the recent acquisition of SRF (including JAT) consolidates Automotive Holdings Group’s position as the largest provider of temperature controlled transport and cold storage operations in Australia with national route coverage and an integrated network of cold store facilities. The acquisition expands Automotive Holdings Group’s customer base and product expertise and will diversify Automotive Holdings Group’s exposure to seasonal peaks in fresh produce, allowing for more efficient use of infrastructure across the year.

Headquartered in Sydney, SRF is a leading national cold logistics business providing refrigerated road and rail line haul, local refrigerated distribution and cold store warehousing. SRF was established in 1952 and has long established relationships with major customers on the east coast of Australia.

JAT is a specialist transport company based in Townsville, Queensland.

The Other Logistics Division comprises:

• AMCAP and Covs (motor parts and industrial supplies distribution) • VSE (vehicle storage and engineering) • Genuine Truck Bodies (body building services to the truck industry) • KTM Sportmotorcycles and HQVA (KTM and Husqvarna motorcycle importation and

distribution in Australia and New Zealand)


Automotive Parts

AMCAP benefits from the expansion of the Ford and Holden Trade Club programs and also in its Truck division through the expanding range of makes and models supported for major fleets. The market share growth of several 3PL partner OEMs also contributed significantly.

AMCAP’s purpose-built storage and distribution facilities include a warehouse storage area of 22,000sqm, which together with the 10,000sqm Covs warehouse represents 32,000sqm of warehouse on a site of 66,000sqm.

AMCAP has been a major seller and distributor of automotive and truck parts in Australia for 45 years. AMCAP can warehouse a range of products and meets specific client requirements as a true 3rd and 4th party sales and logistics operation. It provides services vital to the management of today’s increasingly complex supply chain in terms of sales and marketing, inventory management, radio based “paperless” warehousing and a quick response delivery service. These services and systems allow AMCAP to handle 2.5 million lines per annum over 125,000 Stock Keeping Units (SKUs). AMCAP’s portfolio of franchises includes GM Holden, HSV, Ford, Mitsubishi, Subaru, Iveco Truck, Fuso, AMCAP Truck and Trailer Parts, Hyundai, Kia, Suzuki, VW, Audi, Skoda, PPG Automotive Refinish and 3M.

Covs was acquired by Automotive Holdings Group in 2011 and sells a broad range of products to the general public and to a diverse range of customers across the automotive mechanical, mining and resource sectors.

Covs has 26 strategically located branches across the Perth metropolitan area and regional Western Australia, supported by a state of the art 10,000sqm distribution centre.

Covs met challenging market conditions by lowering the cost of doing business, leveraging technology to improve operational efficiencies, improving customer service levels by increasing the use of its e-commerce platform, implementing better process for managing its working capital and increasing collaboration with AMCAP.

During the year the business realigned its operations to lower costs and increase distribution and sales efficiencies to better serve its customer segments. The strategy strengthened customer relationships, with a high focus on service levels, delivery performance and more structured account management.

Technology has been a key focus in driving improvements in electronic data interchange processes (EDI), innovative vendor managed inventory solutions and a new e-commerce platform. The business is implementing a new enterprise resource planning (ERP) system, which will position Covs for further growth and expansion. The nature of the Covs business allows development of new private label product ranges and during the year in review Covs introduced a comprehensive range of filters under the Premtech brand and further expansion of its successful range of tools under its Kromex brand.


Motorcycle Distribution

KTM and Husqvarna: Automotive Holdings Group was appointed in 1994 as the exclusive KTM distributor in Australia and New Zealand and the business has enjoyed significant sales growth and developed the KTM brand into a leading national motorsport name.

Automotive Holdings Group’s KTM distribution centres in Welshpool (WA) and Auckland (NZ) [74% owned by Automotive Holdings Group, 26% owned by KTM Sportmotorcycle AG], service 76 dealers in Australia and New Zealand.

In January 2014 Automotive Holdings Group acquired the rights to distribute the Husqvarna brand, also owned by KTM, and has established a network of 40 dealers in Australia and New Zealand. Husqvarna is one of the oldest motorcycle manufacturers in the world and a pioneer of the popular motocross segment. The combination of tradition, a 110-year company history, added to KTM’s state-of-the-art technology and devotion to detail offer a very special brand experience.

Distribution of the “New Generation” Husqvarna Motorcycles commenced in January 2014.

Storage and Engineering

Genuine Truck Bodies (GTB) based in Dandenong, Victoria has previously concentrated on building its core business of trailer, rigid and refrigerated truck body manufacture. 2014 saw it and its products effectively launched to the market in April, when it presented its inaugural display at the International Truck Trailer and Equipment Show in Melbourne, showcasing its latest products including a prototype 14 Pallet Dry Freight Rigid.

Vehicle Storage and Engineering (VSE Solutions) continues to grow as a one-stop shop in truck and bus storage and distribution logistics, as well as engineering services to the Australian truck market.

GTB and VSE Solutions also launched a new customer-friendly website and hosted factory visits for leading industry groups such as the Refrigerated Warehouse and Transport Association of Australia, which moves raised market awareness and led to significant orders for GTB’s leading-edge products.

GTB continued to build its focus on refrigerated transport, which now accounts for half its business. It built its first refrigerated trailer little more than two years ago, but now has produced more than 130, using its Genuine Manufacturing System, ensuring on-time delivery.

WMC

WMC is the exclusive distributor of Higer buses and JAC trucks in Australia. Higer Bus Company Limited is a Chinese bus manufacturer founded in 1998 and now supplies buses to 85 countries and territories across South Asia, Middle East, Africa, Russia, East Europe and the Americas, as well as manufacturing buses under contract for Scania. JAC Limited is an established Chinese manufacturer of light-duty trucks, supplying vehicles to more than 100 countries throughout Europe, Asia, the Americas and the Middle East.

Higer has been Australia’s fastest growing bus brand in the Australian market over the past three years and a growing product range coupled with technological, safety and performance improvements will provide it with the ability to expand its footprint within the under-rated national


bus market. JAC’s range of products remains in relative infancy in the competitive Australian light-duty truck market.

Based in Milperra (NSW), WMC distributes across a network of 12 dealers in Australia, comprising both independent dealers and Automotive Holdings Group-owned dealers.

Activity Cycle Taking the business overall, the activity cycle would tend towards being long. This recognises the investment in stock in the automotive retailing operations, which may take some time to turn over. The activity cycle would seem be somewhat shorter in the transport side of the logistics business, but longer in the motorcycle distribution, truck manufacturing and automotive parts operations.

Industry The automotive retail business is notoriously competitive, not only from other new vehicle dealers, but also from the used vehicle market. The commercial vehicle market is also likely to be cyclical, suffering from a significant downturn in demand from the resources sector in the last year. Vehicle retailing is also impacted by government taxation regimes and the threat of change is ever present, especially with the current general taxation review.

Industry Vehicle Sales by State:

NSW 32.0%

Vic 27.2%

Qld 20.1%

WA 10.3%

SA/Tas/ACT/NT 10.4%

Industry Vehicle Sales Units by Buyer Type:

Private 52.6%

Business 38.6%

Government 3.8%

Rental 5.0%

The logistics industry is notoriously competitive and is also at least in part cyclical and subject to changing taxation regimes.

Market Share Market share data is not available.

The company claims to be Australia’s largest automotive retailing group by


sales, profitability, market capitalisation and workforce with 167 franchises at 95 dealership locations in Australia and New Zealand.

Automotive Holdings Group’s strength is in private vehicle sales, which are 52.6% of the total market.

It has a significant logistics operation that has been grown through acquisition. The company claims that the Combined Rand, Harris, Scott’s and JAT is Australia’s largest provider of fully integrated, temperature controlled transport and cold storage provider with major road and rail transport capacity. The combined businesses operate a modern, temperature-controlled and permanently monitored vehicle fleet that includes:

• 373 company prime movers • More than 100 sub-contractor prime movers • 780 road pantechnicons • 300 sub-contractor pantechnicons • 420 rail containers • 80 rigid transport vehicles

Cold storage capacity across the network increased from 97,800 pallets in June 2013 to 154,350 pallets in June 2014. Further expansion is being undertaken with a new state of the art facility under construction at Erskine Park, west of Sydney.

Segmentation Analysis Half-Year to December 2014 ($m)

This reveals that the refrigerated logistics have over twice the EBITDA margin enjoyed by automotive retail.


Suppliers Manufacturer relationships are a key factor in Automotive Retail. Automotive Holdings Group’s long history of strong performance in the industry has produced long-term, successful relationships across the major franchises that it represents. These relationships and performance history provide the Group with opportunities to develop Greenfield operations that assist in the Group’s long-term growth strategies.

Customers There would seem to be some individual major customers within the car retailing and refrigerated logistics segments.

Competitors/Substitutes/Disruptors The Automotive marketplace is changing. Digital disruption provides both challenges and opportunities. The impact of digital disruption on the market means that more digitally engaged businesses have seen increases in their revenues, while more traditional players are experiencing shrinkage. Automotive Holdings Group continues to invest in innovative and agile retail marketing of its dealerships, with a major focus on data management, the on-line space, social media and mobile technology.

Operating within the wider retail environment, Automotive Holdings Group is conscious of the need to keep pace with changing consumer habits. Accordingly, a major focus has been on expanding Automotive Holdings Group’s capacity to engage with prospective customers in the online environment, but in a manner that is complementary to, and supportive of, the large dealer network. The Group’s online strategy has seen revamped websites (Group and business-by-business), increased Automotive Holdings Group visibility through Search Engine Optimisation and greater use of social media and mobile technology to make it easier for prospective buyers to search for cars, find information and ultimately convert into an enquiry and sale. The Group also holds a controlling interest in 360 Financial Services, which operates independently from Automotive Holdings Group’s dealership network to provide consumers with access to financial services through online marketing.

Management Automotive Holdings Group prides itself on retail hubs in the automotive sales and service division with strong management disciplines and processes.


Competitive Advantage Vehicle retailing

• Strong leadership and management structure • Experienced in a changing environment • High performance retail culture • Strong relationships with manufacturers • Retail more than 100,000 vehicles a year • Write more than $1 billion p.a. auto finance • Service database (almost 800,000 repair orders in FY14) • Customer lifecycle (service, tyres, batteries... next sale) • Industry leading operating systems and processes

Two significant recent headwinds have been the move to closure of automotive manufacturing in Australia and the effects on new vehicle sales of the downturn in activity in the resources sector, particularly in Western Australia and Queensland. Automotive Holdings Group has been able to meet these challenges by drawing on its broad portfolio of brands and diversified revenue streams, including new and used vehicle sales, finance, insurance, aftermarket products, repairs and service.

Logistics Generally

Strong industry fundamentals:

• Transporting key consumer staple (food) • Major providers have structural advantage (route efficiencies, utilisation and maintenance

of fleet and equipment) • High barriers to entry (facilities, equipment, systems) • Stable growth outlook

Established competitive advantages:

• Expanded business flowing from acquisitions = circa $650m revenue, with solid, long-term relationships with producers and customers

• National presence with road and rail capability • New purpose-built facilities with large cross docks (see slide below)and implementing new

technologies • Consolidating corridor volumes between the four operators, maximising equipment

utilisation • Synergy savings (facilities, supply contracts, operations) • High service offering (road, rail, storage and distribution) • Remote monitoring of refrigerated transport in real time


Other Logistics

• Market strength – Automotive Holdings Group holds strong positions in the warehousing and distribution of automotive parts and accessories

• Relationships – solid, long-term relationships with manufacturers and customers • Facilities – state of the art distribution centres

This diversified nature of the Group is a key strength, reducing reliance on, and exposure to, particular sectors. It also creates synergies and efficiencies that may not be available to other groups, such as the supply of trading and capital equipment between Group businesses rather than relying on third party providers.

Rivalry among Existing Competitors Strong

Bargaining Power of Customers High

Bargaining Power of Suppliers Strong, but modified perhaps by long-standing relationships

Threat of New Entrants Low – there are significant cost-based barriers to entry. However, see substitutes below.

Threat of Substitute Products or Services Significant:

• Electric vehicles • Self-driving vehicles • Ride sharing and car sharing rather than ownership

A major threat would also be if government again tried to limit the fringe-benefit regime to business use.

Additive manufacturing may also be a significant threat to the parts logistics business, though it might also be used as an advantage.


Financial Risk and Liquidity

Working Capital

These ratios are relatively stable and reflect the rather long activity cycle in much of the business.

Note: I have not shown ratios for 2006 – 2009 because from 2010 onwards Stock Doctor made a change in accounting for inventory, which I have no way to replicate backwards. This change seems to be to do with inventory held on bailment (possession by Automotive Holdings Group, but owned by the vehicle manufacturers). For now I am accepting Stock Doctor’s numbers, but I intend to explore this further with them in order to understand how they have made the adjustments. This issue only affects these ratios and Days Stock Held and is why I have shown no ratios for 2006 – 2009.

This ratio has been fairly stable from 2012 and does not indicate any problems.


These ratios had crept upward somewhat, but now seem to be being brought back.

Debt and Equity

These ratios have worsened significantly, though they are not yet a concern. It will be good to see them brought back towards previous levels.

Interest cover has not deteriorated and although not strong, is solid.


This graph is difficult to interpret because of the low free cash flow in some years. Taking the free cash flow ratio out of the graph shows:

So, although debt to EBITDA had blown out, it is not extreme – the company could repay debt from EBITDA in 18 months.

Profitability

Trend of Sales and Earnings

Sales revenue is advancing steadily, though the rate of increase slowed a bit in the last period.


Likewise, statutory profit.

EBITDA and Operating cash flow are also rising, though free cash flow is quite low due to significant capex.

Level and Trend of Profit Margins

Both gross and net margins are being maintained.


Shareholder Return

Return on Equity at 13.3% is between my cost of capital of 12.5% and my hurdle rate of 15%. After many years where use of debt detracted from return on equity, it has contributed in the most recent period.

Earnings per Share had been increasing in recent years, but was essentially static in the most recent period mainly due to a capital raising via a Share Purchase Plan. Dividends have been increasing with EPS.


Margin of Safety: Price versus Value

Although the return on equity is a bit below my hurdle rate, the four yields all look fair value and all are better than the market average.

Market Liquidity

Automotive Holdings Group is quite a liquid stock.

Timing and Risk Management

How I Found This Stock Automotive Holdings Group had come up a little while ago on my scan for new 52-week highs.

Ratios YieldsChart Model ValueMarket-based Criteria10-year Govt. BondPrice/Coupon 0.00 Coupon/Price x

All Ordinaries AveragePrice/Earnings 15.46 Earnings Yield 6.47%

Data for Automotive Holdings GroupMarket Price $4.19

Price/Earnings 14.12 Earnings Yield 7.08%

EV/EBITDA 7.7 EBITDA Yield 13.05%

EV/ Operating Cash Flow 10.5 Op. Cash Flow Yield 9.55%

My Plan StockCost of Capital 12.5% Return on Equity 13.30%My Hurdle Rate 15.0% Recent ROE trend Fluctuating

All Ords Av StockDividend/Price 5.26% 7.31%Grossed up Dividend Yield

Margin of Safety - Price versus Value

Return on Equity v Cost of Capital

Market LiquidityMarket Capitalisation $1.3bAv traded daily last month $3.5m


Which Model?

Automotive Holdings Group has a value model chart.

Chart Analysis

Although Automotive Holdings Group’s share price has not made a new high for the multi-year sideways pattern, it has recently made a new two-year high.

Set Stops I decided to set my stops based on the most recent support level in the two-year sideways pattern:

Low price used to base stops $3.55 Soft stop (one minimum bid lower) $3.54 Hard stop (2% below soft stop) $3.47

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5.00EXP MOV AVS 12(0) mnth 3.9163 M @ M 301105-310315 AHE - AUTOMOTIVE HOLDINGS GROUP LTD > Steady 4.20

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5.00EXP MOV AVS 52(0) week 3.8634 W @ W 090410-030415 AHE - AUTOMOTIVE HOLDINGS GROUP LTD > Steady 4.20


This is how my stops look on the chart:

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5.00EXP MOV AVS 12(0) mnth 3.9163 M @ M 301105-310315 AHE - AUTOMOTIVE HOLDINGS GROUP LTD > Steady 4.20

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5.00EXP MOV AVS 52(0) week 3.8634 W @ W 090410-030415 AHE - AUTOMOTIVE HOLDINGS GROUP LTD > Steady 4.20


Calculate Position Size

To invest 2% of capital, I am risking 0.35% of capital back to my hard stop.

On 27 March 2015, I bought 12,350 shares at $4.209.

Position size 1st trancheTotal Capital 2,594,174

Buy Price 4.200Hard Sell-Stop 3.470Risk 0.730

% Capital to Invest 2Position it buys 12,353

Max % Capital to Risk 0.5Maximum Position 17,768

Position allowed 12,350

Total % capital at risk 0.35

% capital invested 2.00


Managing the Investment

Updated to 8 May 2015 Since I bought Automotive Holdings group, the company has changed its ASX Ticker code from AHE to AHG. This was to take advantage of the code AHG coming available after being reserved following its use by a company that was delisted. AHG is a ticker code that picks up the company logo:

Since I invested in Automotive Holdings Group it has traded sideways, extending the range of the tight sideways pattern it had been in, but with marginally greater volatility. This seems to be a function of the churning to be expected as its share price struggles to break above resistance at the all-time high in 2007 and 2013 highs:

This price action does not warrant any action with respect to my stops.

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5.00EXP MOV AVS 12(0) mnth 4.0014 M @ M 301105-290515 AHG - AUTOMOTIVE HOLDINGS GROUP LTD > -0.5% -0.02 to 4.17

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5.00EXP MOV AVS 52(0) week 3.9317 W @ W 140510-080515 AHG - AUTOMOTIVE HOLDINGS GROUP LTD > -0.5% -0.02 to 4.17


Yesterday the company made a presentation to the Macquarie Australia Conference, which is available on the ASX Announcements page. Some of the slides add to my earlier analysis:




There was no new guidance in the presentation.

There was nothing new here to warrant action at this time.


Updated to 15 May 2015 On Tuesday 12 May 2015 night the Federal Budget announced a small business tax break that will be advantageous to vehicle retailers. This has been the catalyst on Wednesday 13 May 2015 for Automotive Holdings Group’s share price to break out of the wide sideways pattern it has been in and above the 2013 (black dashed line across the chart) and 2007 highs, though only marginally:

On Thursday 14 May 2015, the breakout was extended a little further and I decided to increase my position by investing a further 25 of capital. To do so, I had first to sell down 2% of capital in Australian Foundation Investment Company.

This was my position size calculation:

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5.00EXP MOV AVS 12(0) mnth 4.0399 M @ M 301105-290515 AHG - AUTOMOTIVE HOLDINGS GROUP LTD > +2.3% +0.10 to 4.42

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5.00EXP MOV AVS 52(0) week 3.9523 W @ W 210510-150515 AHG - AUTOMOTIVE HOLDINGS GROUP LTD > +2.3% +0.10 to 4.42


To invest a further 2% of capital, I would be risking 0.45% of capital on that tranche and 0.95% on the total investment back to my unchanged hard stop.

I placed an order in the market on Thursday 14 May 2015, but did not get a fill.

On 15 May 2015 I was able to buy 11,340 shares at $4.47.

This was the chart at the close of Friday 15 May 2015:

Position size 1st tranche 2nd trancheTotal Capital 2,594,174 2,546,162

Buy Price 4.200 4.490Hard Sell-Stop 3.470 3.470Risk 0.730 1.020

% Capital to Invest 2 2Position it buys 12,353 11,341

Max % Capital to Risk 0.5 0.5Maximum Position 17,768 12,481

Position allowed 12,350 11,340

% capital at risk this tranche 0.35 0.45Cumulative % capital at risk 0.95% capital invested 2.00 2.00

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Updated to 22 June 2015 Since my last review, there has been no news announced concerning Automotive holding Group.

However, the share price has not sustained the new high formed after the federal budget announcement and has fallen back to support:

No action seems to be called for at this time.

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Updated to 15 July 2015 On 6 July 2015 Automotive Holdings Group announced the acquisition of three Mercedes-Benz dealerships in Perth:

This seems to be a positive development and part of the group’s ongoing growth through acquisition.

During the recent market correction, the share price has held above support and begun rising:


Although it is a very short-term indicator, the 5-day moving average of the 260-day High-New Low index has formed a bullish divergence. This may (it was a very short-term rally in May when the previous divergence appeared) be suggesting that the correction has run its course for the time being:

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This combined with the more important bounce off support for the Automotive Holdings Group share price suggested an opportunity to complete building my position to 6% of capital.

This was my position size calculation:

So, I would be risking 0.37% of capital back to my hard stop on this tranche and 1.12% of capital on the whole position.

On 15 July 2015 I bought 11,740 shares at $4.25.

Position size 1st tranche 2nd tranche 3rd trancheTotal Capital 2,594,174 2,546,162 2,500,531

Buy Price 4.200 4.490 4.260Hard Sell-Stop 3.470 3.470 3.470Risk 0.730 1.020 0.790

% Capital to Invest 2 2 2Position it buys 12,353 11,341 11,740

Max % Capital to Risk 0.5 0.5 0.5Maximum Position 17,768 12,481 15,826

Position allowed 12,350 11,340 11,740

% capital at risk this tranche 0.35 0.45 0.37Cumulative % capital at risk 0.95 1.12% capital invested 2.00 2.00 2.00


Updated to 18 August 2015 Two days after the last update, Automotive Holdings Group announced that it was selling the Covs parts business:

This seems to be a positive development, releasing capital from a business that is best operated at scale within the General Parts Co Asia Pacific business.

On 21 July 2015, Automotive Holdings Group announced it was negotiating the the sale and lease back of two of its automotive retail sites in Sydney:

This is a normal transaction for this business, releasing capital to fund growth.


On 14 August 2015, Automotive Holdings Group announced its full year 2015 results. Some key slides from the Investor Presentation:


Western Australia has been the weakest market for Automotive Holdings Group in tough conditions there. Automotive Holdings Group claims they are holding their own there.


The following updates the company profile:


The Refrigerated Logistics division:


Highlights growth in NSW capacity – utilisation fell as capacity increased.

There is considerable change happening in the Other Logistics business segment:


On 19 August Charter Hall announced property acquisitions including the foreshadowed sale and lease back by Automotive Holding Group:


Next, I have now updated my analysis of the Automotive Holdings Group results to include the full year 2015 numbers:


The momentum of the sales trend continues.

Likewise statutory profit.

EBITDA growth has picked up. Operating cash flow is growing, but more slowly. Free cash flow in the last two years has been impacted by investment in plant and equipment – mainly the refrigerated logistics business.


Financial Risk and Liquidity

Working Capital

These ratios have weakened again, but are still within or better than the range 2006 – 2009.

This is a more important ratio for a retailer and is static in recent years.

These ratios have dropped slightly, but are still within the earlier range.

Debt and Equity

Debt has blown out a bit, but looks manageable. The post balance announcements suggested release of capital for further expansion.


The important interest cover ratio has strengthened again in the last year.

I have removed the high 2011 debt to free cash flow bar which distorted the graph. Debt to EBITDA is low and manageable. Debt to free cash flow is higher because of the investment in plant and equipment (mainly they refrigerated logistics division, which project is nearing its end). It was also high in 2014, but does not appear on the graph because free cash flow was zero in that year.

Profitability


Both gross and net margins were increased slightly in the last two years.


Shareholder Return

Return on equity has bounced back and debt is now contributing to it narrowly (it has not always).

Earnings per share growth has slowed somewhat (not due to issue of additional shares). Dividends continue their gradual rise.

Dividends are again not covered by free cash flow. This situation may improve once the investment in the refrigerated logistics division is completed.


Margin of Safety: Price versus Value

Automotive Holdings Group is not remarkably cheap, but is best seen as fair value in the current market.

Return on Equity v Cost of Capital My Cost of Capital 12.5% Return on Equity 14.0% Recent ROE trend flat

It return on equity is not remarkable, but above my cost of capital.

The dividend yield is very attractive and Automotive Holdings Group continues to provide strong income flow.

Market Liquidity

Automotive Holdings Group continues to be very liquid for my portfolio size, with a low bid/ask spread.

Ratios YieldsChart Model ValueMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 15.53 Earnings yield 6.44%


Price/Earnings 14.02 Earnings yield 7.13%

EV/EBITDA 7.0 EBITDA yield 14.24%


All Ordinaries index Average 6.02%Automotive Holdings Group 7.29%

Grossed up Dividend Yield

Market LiquidityMarket Capitalisation $m 1,321Av Buy/sell spread % 0.4Annual Turnover % 65.3Annual Turnover $m 863Av trade/day last year $000 3,450Av trade/day last 20 days $000 2,610Top 20 Ownership % 77.1


The share price has held up quite well in the current correction in the general market:

I need a strong new high to warrant raising my stops, so no further action is required at this time.

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Updated to 9 November 2015 Since the last review there have been a number of news announcements (key points overlined):



Some useful slides from the October Macquarie Western Australian Presentation:


From Spotlight Asia presentations in Singapore and Hong Kong:



Since the last review, the share price has held up well above support formed in 2014-2015:

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I see no reason on my investment plan to revise my stops at this time.

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Updated to 29 January 2016 Since the last update AHG made a presentation in November to a UBS conference at which the chief executive explained how used car sales would be expanded with these slides:


There was also a slide on emerging technologies:

From the Chairman’s address to the AGM:

The automotive sector, like many others, is facing major changes and disruption from new technologies, fresh entrants to the market, and changing buyer behaviour. We are investing in digital strategies, opportunities in the “private‐to‐private” or P2P market, and opening a major used car “warehouse” in Joondalup, in Perth’s burgeoning northern suburbs, as a test case for further expansion of that model.


There was also some discussion of the peer to peer segment:

Also, from the Chairman’s address to the AGM:

Truck and Bus Market We have also significantly strengthened our position in the truck and bus market. We undertook one of our largest investments in the new Daimler Trucks Perth dealership on land adjacent to Perth airport. It is a landmark dealership in a high visibility location that Daimler executives have described as one of the best and most modern truck dealerships and service centres in the world. The Group has also taken a strategic decision to establish a major car and truck service centre in the Pilbara region to capture opportunities being outsourced by the mining sector as it navigates the move from construction to processing.

Refrigerated Logistics Our Refrigerated Logistics division operates in a sector that has experienced an industry downturn in recent times.

Coupled with the challenges of transitioning and integrating our acquisitions and cold store expansions, the division has still managed to deliver encouraging results – but it has not yet taken us to the position we’d like to be. However, as we work our way through capturing the benefits of the identified synergies and grow our service offer to leverage AHG’s very strong strategic position, we are very confident that we will improve earnings and margins – and produce very satisfactory results for Shareholders from this division.


From the Managing Director’s address to the AGM:

Other logistics looks to be an ongoing problem division:




On 17 December the ACCC declined to approve the sale of Covs Parts:


The company has not made any announcement with respect to this matter to date.

The share price continues to hold in a sideways pattern above support:

I do not see a need to raise my stops at this point, although I am tempted to move them under the late 2015 low. However, there is no pressing need to do so and if the low is taken out I can assess at the time if that has triggered my alternative sell rule.

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Updated to 24 March 2016 Since the last update the company issued a statement on 10 February 2016 on parallel imports:

On 12 February 2016 a new senior appointment was announced:


On 17 February 2016 Velpic announced Automotive Holdings Group had begun using their system:

On 18 February 2016 the Australian Competition and Consumer Commission cleared the revised divestment of the Covs Part business:


This was the company’s announcement of the same date:

On the same date, the company announced a dealership acquisition:


On 19 February 2016 the company announced its interim report. These slides are informative from the investor presentation:

The group in a nutshell:



My analysis of the interim report follows. Note 2016 flow data has been annualised.


Sales growth has been hampered by weakness in Western Australia and the refrigerated Transport business.

Likewise, statutory profit and EBITDA.


Operating cash flow was down due to some changes in the structuring of the business. This is potentially a problem if not corrected going forward.

Likewise free cash flow which has been further impacted by acquisitions, which I include in capital expenditure.

Financial Risk

Working Capital


No problem here.

Or here.

Receivables have been brought back down in the ten-year range.

Likewise payables.


Days cash conversion is steady.

The reduction in days working capital has been maintained.

Cost of doing business is still blowing out and requires ongoing review. I have not had the time to analyse all the components yet.


Debt and Equity

Gearing has been increased and although the company says it has balance sheet capacity for further acquisitions, this aspect bears watching going forward.

Debt to EBITDA is OK. Debt to free cash flow is hard to analyse.

The all-important net interest cover remains strong and has strengthened.


Profitability


Margins have held up overall.

Shareholder Return

Return on equity increased slightly. Debt continues to contribute.


Earnings and dividends per share continued their upward path.

The payout ratio remains at 70%.

Dividends are not covered by free cash flow and is a longer term concern if not corrected.

Overall, I have some concerns about this business, but at this stage they are not serious enough to warrant selling out.


Summary: Price versus Value and Returns

Automotive Holdings Group is not really cheap, but represents good value at the present price.

Return on equity is above my required return.

The dividend stream is most attractive.

Concerns are the loss of momentum in return on equity growth and free cash flow as already mentioned above.

RatiosChart Model ValueMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 14.93

Data for Austomotive Holdings GroupMarket Price $4.12

Price/Earnings 12.94

EV/EBITDA 7.1


My Cost of Capital 12.5%Return on Equity 14.3%Recent ROE trend rising

Return on Equity v Cost of Capital

All Ordinaries index Average 5.94%Austomotive Holdings Group 7.80%

My Average Cost $ 4.31Dividend per share $ 0.225Effective yield 7.46%


Growth % 10 Years 5 Years

Operating Revenue 143.4% 38.6%Earnings per Share 77.1% 28.2%Return on Equity 53.4% 0.3%Dividends per Share 80.0% 25.0%Free Cash Flow 95.7% -235.4%


Market Liquidity

Automotive Holdings Group is a med cap with ample liquidity for my account size.

Timing and Risk Management

Chart Analysis

The share price continues to trade sideways:

Market LiquidityMarket Capitalisation $m 1,263Av Buy/sell spread % 0.4Annual Turnover % 82.2Annual Turnover $m 1,038Av trade/day last year $000 4,153Av trade/day last 20 days $000 3,783Top 20 Ownership % 73.1

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I see no reason to raise my stops on my investment plan, but see my comment at the last update.

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Updated to 22 July 2016 On 23 May 2016 the company announced acquisitions in Melbourne and Sydney, plus a divestment in Perth:

Then on 1 June 2016, the company announced acquisition of a key Mazda dealership in Melbourne:


These acquisitions take the company to 185 franchises at 107 dealership locations in Australia and New Zealand.

While I was overseas the share price showed considerable weakness:

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This tested my earlier comment about maybe selling if the mid-2015 lows were breached, which they were. After much thought, I decided to rely on my stops where they were. Fortunately, July has seen a sustained rally. This episode confirms to me that my stops were in the right place. The reasoning for this is that the late 2015 rally did not make a clear new high, so there was no upward trend to form a higher trough under which to move my stops.

Automotive Holdings Group is due to report their full-year earnings on 19 August 2016.

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Updated to 23 August 2016 Since the last update, Automotive Holdings Group have announced the acquisition of a Daimler truck dealership in Melbourne:

Then the company announced the transition to a new chief executive:



On 19 August Automotive Holdings Group announced its full-year earnings and also advised it was making a placement and SPP share issue. I will not participate in the SPP issue as I have already built my holding to my maximum of 6% of capital.

My analysis of the results follows:



The steady growth is sales revenue continues.

Statutory profit has not increased quite as well in the latest year.

Likewise at operating profit level.


Operating cash flow has picked up.

So has free cash flow.

Financial Risk

Working Capital


The global working capital ratios remain strong

Inventory seems well controlled

Receivables days has again been lowered slightly

Likewise payables


Days cash conversion crept up slightly

But days working capital was lowered again

Cost of doing business continues to rise, which will bear watching


Debt and Equity

Debt has risen again, but the placement should boost equity and reduce the debt ratios

Likewise, the leverage ratio should be reduced by the placement

Debt to free cash flow has been lowered


Interest coved looks solid

Profitability


Margins are coming under some slight pressure, but from a high level

Return on assets is stable


Shareholder Return

As is return on equity. Use of debt does not boost return on equity by much

The trend here is solid

The payout ratio is high, but stable


For the first time in four years free cash flow has covered the dividend

Summary: Price versus Value and Returns

Automotive Holdings Group does not look overvalued. Enterprise value to EBITDA is depressed by very substantial investments in associates, so is probably unduly low

Return on Equity v Cost of Capital My Cost of Capital 12.5% Return on Equity 14.0% Recent ROE trend flat

Return on Equity is steady, above my cost of capital

RatiosChart Model ValueMarket-based CriteriaAll Ordinaries AveragePrice/Earnings 17.10


Price/Earnings 15.54

EV/EBITDA 3.1



The dividend yield is quite attractive.

Market Liquidity

The stock is reasonably liquid

Timing and Capital Preservation

Chart Analysis

The share price moved up quite strongly in anticipation of the result:

All Ordinaries index Average 5.13%Automotive Holdings Group 6.52%

My Average Cost $ 4.31Dividend per share $ 0.225Effective yield 7.46%


Market LiquidityMarket Capitalisation $m 1,511Av Buy/sell spread % 0.2Annual Turnover % 89.6Annual Turnover $m 1,354Av trade/day last year $000 5,415Av trade/day last 20 days $000 5,123Top 20 Ownership % 73.1

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Now that the share price has made a clear new high, there is a trend and I can tweak my stops up under the mid 2015 trough low:

Low price used to base stops $3.64 Soft stop (one minimum bid lower) $3.63 Hard stop (2% below soft stop) $3.56

This is how the new stops look on the chart:

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Other announcements with the annual earnings report:

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Some slides from the investor presentation:


Refrigerated Logistics initiatives:


Updated to 21 November 2016 I was already fully invested in Automotive Holdings Group at 6% of capital, so I did not take up the share purchase plan offer.

On 1 September 2016 Automotive Holdings Group announced the completion of some recent acquisitions:

On 16 September 2016, Automotive Holdings Group issued a statement with regard to the ASIC review of ‘add-on” insurance and finance arrangements in the industry:


Also on 16 September 2016, Automotive Holdings Group announced the closure of the Share Purchase Plan offer:


On 25 October 2016, Automotive Holdings Group issued a statement concering specuationon the sale of the refrigerated logistics business:

On 18 November 2016, Automotive Holdings Group issued a statement prior to its AGM:



Subsequent to holding its AGM, Automotive Holdings Group release the presentations give. These are worth reading, but the key issues were discussed in the above statement.

Turning now to the share price, Automotive Holdings Group’s shares had been steadily declining from their late August all-time high. On Thursday 17 November 2016, the price violated my soft stop, but not my hard stop:


Then on Friday 18 November, the day of the AGM, the share price violated my hard stop also, though it closed well above my stops:

Unfortunately, I was at an AIA all-day seminar on Friday and did not see this until that evening.

My stops are driven by the logic of my investment plan which is based on the trend definition that succeeding troughs in the trend should be higher. Troughs are defined by the lows of the swings in the trend, not by their closing prices. So, my stops had been violated on Friday even though the close was above the stops. So, there is no question but that I should sell on Monday.

I am in Melbourne this week for the Ring cycle, but having my laptop with me, I was able to sell my entire holding early in the day on Monday 21 November at an average price of $3.7474.

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Outcome of the Investment

Evaluation Against Investment Plan Model identification Correctly classified as value model Capital invested 6% Diversification I held no other stock in this industry Max % capital risked 1.12% - within my max risk of 1.5% Liquidity Automotive Holding Group was a quite liquid stock Buy Signal New high above a wide sideways pattern Margin of safety PER was a little too close to the market average. Dividend yield was very

attractive. Position building Built to 6% of capital in three tranches Profit-taking NA Sell-stop Sold when stops were violated

Result of investment $Total sale proceeds 132,638.47less Total purchase cost 152,680.57Realised capital gain/loss -20,042.10plus Dividends & Franking Credits 17,968.00Net total return -2,074.10

Documents

Automotive Holdings Group - bwts.com.au · It provides services vital to the management of today’s increasingly complex supply chain in terms of sales and marketing, inventory management,