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Leading Independent Investment Research

Morningstar, Inc.

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Event-Driven

<div class="content-highlight"><h2>Cost savings, added scale, and brand diversity will help <a href="https://www.smartkarma.com/entities/4636" target="_blank" data-smartkarma-citation="entities:4636:1">AP Eagers Ltd (APE AU)</a> navigate the challenging auto retailing environment.</h2></div><hr><p>We expect the merger between car retailing giants <a href="https://www.smartkarma.com/entities/9266" target="_blank" data-smartkarma-citation="entities:9266:1">Automotive Holdings (AHG AU)</a> and AP Eagers will proceed and for it to carry major benefits for both parties. The merged entity, which will control over 12% of the industry, will be in a strengthened position to manage the cyclical (declining vehicle sales) and structural (regulatory reform) challenges the car retailing industry is currently facing. The declining residential housing market and consequential negative wealth effect have weighed on discretionary spending, but we expect this to stabilise which will help vehicle sales recover. We do not forecast a major change in per capita vehicle fleet ownership, and as such, vehicle sales will need to resume growth to prevent excessive ageing. The combined entity will have a strong enough balance sheet to endure these nearterm headwinds and will also see its competitive position strengthened.</p><hr><h2>Key Takeaways</h2><ul>
<li>Shares in AP Eagers are fairly valued relative to our AUD 9.00 per share valuation. However, we see potential upside to the current AUD 13.50 million in cost synergies target, which could add another AUD 1.50 per share to our valuation.</li>
<li>The declining residential property market has led to a 6% decline in new vehicle sales volume during the past year. Notwithstanding, this is a cyclical challenge, one which we've seen before during the global financial crisis and are confident the industry will overcome. We don't envisage a major change in longterm vehicle ownership rates, the number of vehicles sold per capita, or the average vehicle age.</li>
<li>The merged entity will benefit from increased brand and regional diversity, which should smooth out volatility and drive a full recovery in new vehicle sales by fiscal 2022. Over the long run, we expect vehicle sales volumes to grow at around 1%-2% per year.</li>
<li>We continue to forecast part of the forgone profits generated through the sale of previously lucrative finance and insurance profits will be recovered through higher gross margins at the larger dealers. Accordingly, we expect sale prices to gradually increase, and both firms (as a standalone business) to resume growing EBITDA margins by around 20 basis points per year from fiscal 2020 onwards, stabilising at around 3.3% for Automotive Holdings and 3.7% for AP Eagers.</li>
</ul>

Cost savings, added scale, and brand diversity will help AP Eagers Ltd (APE AU) navigate the challenging auto retailing environment.We expect the merger between car retailing giants Automotive Holdings (AHG AU) and AP Eagers will proceed and for it to carry major benefits for both parties. The merged entity, which will control over 12% of the industry, will be in a strengthened position to manage the cyclical (declining vehicle sales) and structural (regulatory reform) challenges the car retailing industry is currently facing. The declining residential housing market and consequential negative wealth effect have weighed on discretionary spending, but we expect this to stabilise which will help vehicle sales recover. We do not forecast a major change in per capita vehicle fleet ownership, and as such, vehicle sales will need to resume growth to prevent excessive ageing. The combined entity will have a strong enough balance sheet to endure these nearterm headwinds and will also see its competitive position strengthened.Key Takeaways
Shares in AP Eagers are fairly valued relative to our AUD 9.00 per share valuation. However, we see potential upside to the current AUD 13.50 million in cost synergies target, which could add another AUD 1.50 per share to our valuation.
The declining residential property market has led to a 6% decline in new vehicle sales volume during the past year. Notwithstanding, this is a cyclical challenge, one which we've seen before during the global financial crisis and are confident the industry will overcome. We don't envisage a major change in longterm vehicle ownership rates, the number of vehicles sold per capita, or the average vehicle age.
The merged entity will benefit from increased brand and regional diversity, which should smooth out volatility and drive a full recovery in new vehicle sales by fiscal 2022. Over the long run, we expect vehicle sales volumes to grow at around 1%-2% per year.
We continue to forecast part of the forgone profits generated through the sale of previously lucrative finance and insurance profits will be recovered through higher gross margins at the larger dealers. Accordingly, we expect sale prices to gradually increase, and both firms (as a standalone business) to resume growing EBITDA margins by around 20 basis points per year from fiscal 2020 onwards, stabilising at around 3.3% for Automotive Holdings and 3.7% for AP Eagers.


Tie-Up Shifts Car Dealerships into Top Gear

Ap Eagers Ltd

Tie-Up Shifts Car Dealerships into Top Gear