Expansion With Polestar And Zeekr Will Strengthen Luxury EV Portfolio

Key Takeaways

• Strategic acquisitions and market expansion into luxury EV brands are key to long-term revenue growth and earnings stability.
  
• Effective inventory management and targeting high-margin sectors enhance cash flow and profitability, with financial gains also likely from interest rate reductions.
  
• Autosports Group faces challenges from declining vehicle demand, pressured margins, rising interest costs, and cash flow strains, necessitating strategic adjustments in inventory and cost management.

Catalysts

Engages in the motor vehicle retailing business in Australia and New Zealand.

• Expansion into new markets: Autosports Group is expanding by incorporating new luxury EV brands Polestar and Zeekr, which align with their luxury strategy and are expected to contribute to revenue growth through low-cost additions and potential future market share. This should positively impact revenue.
  
• Acquisition growth: The strategic acquisition of the Stillwell Motor Group has already contributed $80 million in revenue. The full-year benefit from this acquisition is expected to further drive revenue growth and stabilize earnings as it fully integrates in the fiscal year 2025.
  
• Inventory management improvements: The deliberate reduction in new vehicle inventory by $80 million positions the company to achieve better inventory turnover. This enhances cash flow and prepares them for market fluctuations, potentially improving net margins over time.
  
• Resilience in high-margin sectors: Growth in high-margin aftersales departments, such as service and parts, is projected to continue, supporting overall gross margin and contributing positively to earnings amidst challenging new vehicle market conditions.
  
• Financial leverage from interest rates: Any future interest rate reductions will significantly lower costs, reduce operating expenses, and bolster profitability. This leverage will improve net margins and overall earnings as seen from potential $2 million savings from rate reductions.

Autosports Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Autosports Group's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 1.6% in 3 years time.
• Analysts expect earnings to reach A$50.9 million (and earnings per share of A$0.25) by about May 2028, up from A$36.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$68.2 million in earnings, and the most bearish expecting A$38 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 10.8x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.4%, as per the Simply Wall St company report.

Autosports Group Future Earnings Per Share Growth

Risks

• The challenging new vehicle market, with a decline of 7.4% overall and 13% in the luxury segment, could continue to pressure Autosports Group’s revenue and margins.
  
• Gross profit margins have already declined 1.4% to 18.3% due to market pressures and an intentional inventory reduction strategy, indicating further risks to margins if market conditions do not improve.
  
• Rising interest costs, which grew to $32.3 million, negatively impact net margins and profitability, and may offset any revenue gains if interest rates do not decrease significantly.
  
• The risk of further discounting in response to weak new car demand could further erode gross profit margins and affect overall earnings if competitive pressures persist.
  
• Despite reductions in new vehicle inventory, continued market weakness or a failure to effectively manage inventory in line with demand could strain cash flow and necessitate further cost-cutting measures.

Valuation

• The analysts have a consensus price target of A$2.087 for Autosports Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$2.58, and the most bearish reporting a price target of just A$1.66.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$3.1 billion, earnings will come to A$50.9 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 11.4%.
• Given the current share price of A$1.93, the analyst price target of A$2.09 is 7.3% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.