Stocks in Auto Space: Is the long-due revival nearing - AMA, BAP, CAR

  • Jun 24, 2020 AEST
  • Team Kalkine
Stocks in Auto Space: Is the long-due revival nearing - AMA, BAP, CAR

Summary

  • The automotive sector has been grappling with several challenges for a while now. Droughts, floods, bushfires, tight lending conditions and the recent COVID-19 pandemic, have severely impacted the auto industry.
  • SARS-CoV-2 outbreak has led to a significant fall in vehicle sales in April and May 2020, according to the industry body, FCAI.
  • A contraction in household income, and as a result, household expenditure, has resulted in a substantial reduction in retail activity.
  • However, companies like carsales noted a drop in total inventory over the last six weeks due to a considerable decrease in time-to-sell driven improved demand from car buyers after the easing of social distancing restrictions.

The Australian automotive sector has remained operational during the COVID-19 crisis to ensure that Australian citizens can replace and service their vehicles to ensure safety concerns are addressed. The dealership service departments are offering the replacement of faulty Takata airbags. The Australian government had earlier made it mandatory for all vehicles with Takata airbags to be recalled.

In a recent report released by the Federal Chamber of Automotive industries, the peak body for the automotive industry in Australia, there was a drop of 35.3% in May 2020 sales as compared to the pcp (previous corresponding period), with only 59,894 vehicles sold.

Image Source: FCAI

FCAI’s CEO Tony Weber said that the sector has been under pressure for some time and May 2020 was the 26th consecutive month of negative growth in the market. The drop in sales was due to factors such as famines, floods, bushfires, strict lending requirements, unfavourable exchange rates, & political uncertainty. For the last three months, the sector has experienced the impact of the COVID-19 pandemic.

The same was confirmed by one of the reports by Deloitte, which highlighted that the sector had a swift & severe effect on the globally integrated automotive industry.

COVID-19, the primary health concern at present, has also led to an economic crisis.  The pandemic had implications for the local sales sector as well as the automotive industry.

Also, in the past few months, the country noted a contraction of household income and household expenditure. These factors, along with uncertainty surrounding the pandemic, have forced people to curtail their retail activity.

The RBA has also warned about the biggest contraction in national output and income over the first six months of 2020 that we have seen since the Great Depression.

Other than this, there is also a certain level of fear seen in the market concerning the second wave of COVID-19 in Australia. As per the report released by the Australian Government Department of Health, the country reported a total of 20 new cases of coronavirus in the last 24 hours (as on 23 June 2020 9:00 PM AEST), with 17 from Victoria, two from Western Australia, and one from New South Wales.

Let us now look at three ASX-listed stocks from the automotive industry and see their recent developments.

AMA Limited (ASX:AMA)

AMA Limited is a leader in the automotive aftercare and accessories market.

On 19 June 2020, AMA Limited updated that the service agreement discussions with its major insurance partners are completed. These discussions resulted in better pricing, which will permit the business to regain the standard operating cost inflation plus the costs of improving motor vehicle technology.

The new deal would provide significant revenue growth in real terms once repair volumes come back to normal levels.

Further, the company did better regarding profitability & cash generation/use (which includes the effect of JobKeeper). Amid COVID-19, the performance was better than management and market outlooks despite softer repair volumes due to mobility restrictions.

The company projects its repair volume in June to remain at the low levels. It would improve with time and for normal pre-COVID-19 repair volume levels to develop by the start of the second quarter of FY2021 with the ease in the residual Government limitations as well as normal vehicle traffic volumes arrival.

Stock Information:

On 24 June 2020, AMA shares were trading at A$0.625 (at 3:34 PM AEST), up 1.626% from its previous close. The stock has generated an outstanding return of 272.73% in the last three months.

Bapcor Limited (ASX:BAP)

Bapcor Limited is the distributor of automotive aftermarket parts.

On 20 May 2020, Bapcor announced the completion of the Share Purchase Plan where it received valid applications of total A$122 million from the registered shareholders for the SPP. The SPP followed the completion of the A$180 million underwritten institutional placement.

Bapcor announced capital raising to strengthen its balance sheet and position the company in a solid position so that it can continue to achieve its 5-year strategy & any other growth initiatives that may occur.

The proceeds would be used for reducing the net debt position & gearing. The capital raising adds to various operational plans executed by Bapcor to maintain and manage cash flow.

The Financial performance of the company was strong during January and February 2020 with YTD revenue till February increased 12.7% on pcp. The trading performance was below expectation with revenue growth of 11.5% on pcp. The result reflects the benefit of the acquisition, which got offset by the COVID-19 outbreak and the restriction imposed by the government.

Stock Information:

On 24 June 2020, BAP shares were trading at A$5.920 (at 3:34 PM AEST), up 0.852% from its previous close. The stock has generated an impressive return of 83.96% in the last three months.

carsales.com Limited (ASX:CAR)

carsales.com Limited is the largest online automotive, motorcycle and marine classifieds business in Australia.

On 17 June 2020, the company provided the business update and FY2020 result estimates. Below table shows the estimated FY2020 results for the year ended 30 June 2020.

Image Source: CAR report

Trading Observation:

In Australia, the overall lead and traffic volumes continued to improve with the ease in the social distancing measures. From 22 April to 16 June 2020, there was strong growth in the lead volumes on pcp.

Total inventory on carsales.com.au dropped over the last six weeks because of a substantial decrease in time to sell due to improved demand from car buyers after the easing of social distancing restrictions. The other factors that influenced the inventory were challenges faced by the dealers getting used and new car stock in the current environment. Also, as per CAR’s research showed that a surge in first-time car buyers & people adding a new car to their household so that they can avoid public transport.

International:

The trends in Brazil and Korea were the same as before. The Encar business is doing well.

Debt Refinances and Dividends:

The company has refinanced its debt facilities. The maturity of Tranche A got extended from July 2021 to July 2024. The tranche A facility size increased from A$335 million to A$440 million. There is no change in its Tranche B debt facility of A$210m expiring in July 2023.

Sale of interest in Stratton:

carsales has completed the sale of 50.1% interest in Stratton Finance Pty Ltd. The proceeds from the sale would support the company to concentrate on other core business growth opportunities going forward.

Stock Information:

On 24 June 2020, CAR shares were trading at A$17.780 (at 3:34 PM AEST), up 1.138% from its previous close. The stock has generated a notable return of 67.91% in the last three months.

The automotive industry has witnessed a substantial fall in volume in the last couple of months. With the economic recovery likely to be slower than expected and the second wave of the virus seeming imminent, the industry is anticipated to remain under pressure. However, there is a ray of hope with an improvement witnessed in demand with the easing restrictions.

 


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