Acquisition Of BMW And Volvo Dealerships Will Widen Luxury Portfolio But Margins May Shrink

Key Takeaways

• Strategic acquisitions and market consolidation in luxury brands aim to enhance revenue growth and competitive positioning in the luxury automotive sector.
  
• Efficient debt reduction and capital management are expected to improve financial leverage, stabilizing profits through sustained gross margins.
  
• Elevated inventory levels and competitive pressures risk profit margins, while high interest costs and integration challenges further threaten earnings and stability.

Catalysts

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

• The acquisition of the Stillwell Motor Group, anticipated to add $260 million in additional revenue for Autosports Group for FY '25, is expected to drive revenue growth through meaningful scale and expansion in high-demand luxury brands like BMW and Volvo.
  
• Continued organic growth in service and parts departments, driven by improved new vehicle supply and higher vehicle volumes from the past two years, is expected to support high-margin revenue streams, thereby enhancing overall gross profit margins.
  
• The company's strategic focus on maintaining a disciplined gross margin amidst a competitive market and increasing marketing investments is projected to support sustained margins and profit stability.
  
• Aggressive corporate debt reduction and efficient capital management efforts are expected to improve financial leverage, potentially supporting future earnings growth as interest expenses decrease.
  
• The company's commitment to expansion through acquisition and consolidation of fragmented markets, targeting $250 million per annum in acquired revenue, is expected to further drive revenue growth and strengthen its competitive position in luxury automotive retail.

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 shrink from 2.3% today to 1.8% in 3 years time.
• Analysts expect earnings to reach A$56.1 million (and earnings per share of A$0.28) by about February 2028, down from A$60.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$77.7 million in earnings, and the most bearish expecting A$44.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, up from 5.8x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 17.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.82%, as per the Simply Wall St company report.

Autosports Group Future Earnings Per Share Growth

Risks

• The competitive new vehicle market combined with elevated inventory levels poses a risk to gross margins, which could negatively impact net margins if inventory continues to rise and requires aggressive discounting.
  
• Higher interest costs have already impacted net profit before tax, and continued increases in interest rates or further debt could further erode earnings.
  
• The acquisition of the Stillwell Motor Group, while potentially beneficial, carries integration and execution risks, which could impact revenue growth if managed poorly.
  
• Depreciation and the financial impact of AASB 16 lease adjustments have increased cash flow and profit volatility, creating potential risks to future earnings stability.
  
• Pressure on gross profit margins from increased marketing and promotional costs, necessary to maintain sales targets, could reduce overall profitability and net margins if sales volume targets are not met.

Valuation

• The analysts have a consensus price target of A$2.155 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$2.86, and the most bearish reporting a price target of just A$1.67.
  
• 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$56.1 million, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 10.8%.
  
• Given the current share price of A$1.73, the analyst price target of A$2.15 is 19.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.