Citi’s take on 5 ASX-listed automotive stocks, including potential potholes ahead

New car sales in June hit their highest level since 2018, with almost 125,000 vehicles sold up 25% on the same month last year, according to figures from the Federal Chamber of Automotive Industries.

But challenges remain, with the supply chain snarls that arose during COVID not in the rear-view mirror just yet and expectations of further rate rises – despite the RBA’s pause this week – as detailed in a recent broker note from Citi.

“Of the auto dealers, we continue to see the Luxury segment as the best performing,” says the Citi report, authored by analysts from the small- and mid-cap team of Jack Dunn, CFA, Sam Teeger, CFA, William Park and Siraj Ahmed.

Here’s their take on a handful of ASX-listed stocks exposed to the local automotive sector.

Autosports Group (ASX: ASG)

A retailer of prestige and luxury cars, Autosports Group has built a dealership network of 40 businesses across NSW, Queensland and Victoria since it was established in 2006.

Rating: BUY

Market cap: $426 million

Price target: $3.25

With a share price of $2.14 at the close on Thursday, Citi regards ASG as trading at a discount of around 15% to domestic peers – which it attributes to the company’s market share and concentration in the luxury segment.

Though the analysts point to a few risks including:

• A significant economic downturn that would hit new car sales

• A potential shift by automotive manufacturers toward agency and direct-to-consumer models

• Restrictions on dealership expansion by manufacturers

• Increased competition could reduce profit margins. 

Eagers Automotive (ASX: APE)

Australia’s largest automotive dealership group, Eagers sells both new and used vehicles and also sells and distributes parts, accessories, car care products and various services.

Rating: BUY

Market cap: $3.67 billion

Price target: $14.05

Eagers’ share price closed at $14.40 on Thursday.

Alongside the risks outlined above, the Citi analysts cite the following as potential risks:

• Online peer-to-peer marketplaces increasing their share of used cars

• A failure of automotive manufacturer partners to keep up with the shift to EVs, resulting in a loss of market share.

McMillan Shakespeare Limited (ASX: MMS)

A provider of automotive salary packaging, leasing services, fleet and asset management and financing services, MMS operates through subsidiaries in Australia, New Zealand and the UK. Through its employee services, McMillan Shakespeare also provides disability plan management.

Rating: NEUTRAL

Market cap: $1.24 billion

Price target: $16.10

MMS shares closed at $17.77 on Thursday 6 July.

A handful of risks cited by Citi analysts include:

• Potential changes to Fringe Benefit Tax rules

• Revisions to the National Disability Insurance Scheme budget

• Macroeconomic effects on the yields generated by novated leasing

• Changes to the commission structures of finance services and insurance sales

• Changes to fleet requirements by organisations.

“If the impact on the company from any of these factors proves to be greater than we anticipate, the stock will likely have difficulty achieving our financial and price targets,” says Citi.

“Conversely, if any of these factors proves to have less of an effect than we anticipate, the stock could outperform our target.”

Peter Warren Automotive Holdings (ASX: PWR)

A privately-owned automotive dealership group, Peter Warren Automotive has been operating in Australia for more than 60 years, with 82 franchise operations and partnerships with 28 manufacturers across all parts of the retail automotive market.

Rating: BUY

Market cap: $442.7 million

Price target: $3.85

PWR shares were trading at $2.56 when the market closed on Thursday.

As with the other automotive groups in Citi’s coverage, risks include:

• A significant economic downturn reducing demand for new cars

• A shift in the automotive sales strategies employed by automotive manufacturers

• Restrictions on dealership expansions and

• Increased competition knocking profit margins.

Smartgroup Corporation (ASX: SIQ)

This company is a provider of salary packaging, novated leasing services and other employee management services.

Rating: NEUTRAL

Market cap: $1 billion

Price Target: $6.95

Smartgroup shares closed at $7.70 on Thursday.

Potential risks on the horizon include changes to Fringe Benefit Tax rules, price competition, a significant economic downturn that could hit novate leasing yields.