Limited upside for Eagers Automotive amid continued supply risks: Goldman Sachs

Goldman Sachs has cut its recommendation on Eagers Automotive Ltd (ASX: APE) to hold, from buy, saying the current supply disruptions affecting the automotive sector could continue until 2023, while upside opportunities were already reflected in the car dealer’s current circa $13 stock price.

The downgrade comes as car dealers struggle during 2021 with tight supplies of new cars and strong demand.  

Covid disruptions and a shortage in semiconductor microchips, used extensively in modern vehicles, forced production cuts on global carmakers last year, and has resulted in much tighter supply in Australia.

And while this has helped margins of dealers like Eagers Automotive, Goldmans says it is also a risk.

“Dislocation in new car supply … may impact [Eagers Automotive’s] ability to meet its order book demand,” the broker noted. 

Goldmans, which cut its target price of Eagers Automotive to $15.20, from $17, thinks the supply situation in Australia may not return to normal until 2023. 

“For Australia, we continue to expect the supply run-rate into Australia to normalize to pre-covid levels in CY23.”

Fatter margins, “very strong demand” for new vehicles drives earnings jump

Eagers Automotive on February 24 reported FY21 net profit after tax of $330.7m, 111% above the FY20 figure.

It also announced a fully franked final dividend for the period of 42.5 cents per share, taking total distribution for FY21 to 70.9 cents per share, up from 25 cents per share for FY20.

Net underlying margins increased to 4.6%, against 2.4% in FY2020, driven by tighter market supply and measures to reduce costs.  

Despite its downgrade, Goldmans says Eagers Automotive could benefit from its proposed new joint venture with manufacturer BYD to sell the Chinese manufacturer’s electric and hybrid vehicles in Australia. 

Other opportunities included programs to optimise Eagers’ property portfolio and reduce costs.