Consumer Discretionary

Next Eagers acquisition could drive near-term earnings forecast upgrade: Bell Potter

Mon 28 Mar 22, 4:12pm (AEST)
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Key Points

  • Eagers to use the $92m proceeds from the Bill Buckle Auto Group sale on acquisitions that align with its Next100 strategy
  • Bell Potter suspects the next acquisition/s can provide a near-term driver of an earnings forecasts upgrade
  • Morgans questions whether margin levels can be sustained once supply normalises

While Eagers Automotive’s (ASX: APE) decision to offload Sydney northern beaches dealership Bill Buckle Auto Group (BBAG) for $92m did surprise some analysts, management advised investors’ of plans to redeploy the funds on an acquisition that better aligns with the company’s Next100 strategy.

“The sale proceeds will provide Eagers Automotive with additional capacity to invest in organic growth and pursue identified strategic acquisition opportunities’’ the company told the ASX.

One possible option for the proceeds of BBAG, speculated Bell Potter could be the decision to up-scale in the company’s fixed-price used-vehicle business easyauto123.

Growth-by-acquisition

But a more likely option mooted by Bell Potter in a recent client note is for Eagers to continue its growth-by-acquisition strategy.

After assessing what BBAG lacked, Bell Potter suspects Eagers will be looking to acquire conveniently located sites, greater used car sales/inventory and/or more potential for expansion or productivity improvements.

While Bell Potter maintains a “buy” rating on Eagers with the price target dropping  3% to $16.75 – the broker suspects the next acquisition/s can provide a near-term driver of an earnings forecasts upgrade.

Fundamentals

Eagers share price has lost some ground since announcing a record result for FY21 on 24 February. Based on underlying demand for vehicles and a check on operational expenses, The company delivered a record full year statutory profit after tax of $330.7m, up 112% year-on-year.

The company paid a fully franked final dividend of 42.5 cents per share, up 70% year on year, and ended the year with a cash position of $197.6m.

In addition to the company’s $169m worth of property in the full year period, Eagers also acquired Toowoomba Ford and franchises in Cardiff and Maitland.

The auto retailer also invested in new retail formats including AutoMall West at Indooroopilly Shopping Centre in Brisbane.

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Eagers share price movement over 12 months.

What other brokers think

Based on the five brokers covering Eagers (as reported on by FN Arena), the stock is currently trading with a 30.7% upside to the target price of $17.86.

Ord Minnett expects Eagers to reinvest sale capital from BBAG into purchases that better align with its new vehicle dealership model outlook and retains a Buy and target price of $17.50.

While Morgans retains an Add recommendation, the broker questions whether margin levels can be sustained once supply normalises and lowers the target to $16.70 from $17.20 on a lower market PE. 

Despite management’s uncertainty over the resolution of supply constraints, Macquarie was encouraged by the 19.2% gross margin achieved in the second half and the increase in the new vehicle order book and maintains an Outperform with the target rising to $18.75 from $18.00.

Eagers was a key February stock pick for Morgan Stanley, with the broker retaining an Overweight rating and target price of $18.00.

Consensus on Eagers is Moderate buy.

Based on Morningstar's fair value of $14.64, the stock appears undervalued.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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