3 Updates from AMA Group

Australia’s automobile sector witnessed ceasing of the manufacturing facility of automobile companies Ford, Holden and Toyota in Australia, as mentioned by the Department of Industry, Innovation and Science, Australia.

The companies have however maintained a substantial presence in the country through operations in sales and distribution, engineering services and design and product development.

In light of the decreasing manufacturing and decreasing charisma of the automobile sector, few initiatives were brought in front by the Australian Government to support the affected regions and communities. These initiatives include:

· Automotive Transformation Scheme, which encourages competitive investment and innovation in the automotive industry through to 2020;

· $100 million Advanced Manufacturing Fund which includes:

§ $10 million for an Automotive Innovation Labs Program to build automotive test facilities and increase access to design and test facilities for automotive products;

§ $5 million for an Automotive Engineering Graduate Program to increase the pipeline of highly trained graduate engineers into Australia’s automotive sector;

§ $47.5 million for the Advanced Manufacturing Growth Fund helping car-related businesses move into other industries in South Australia and Victoria.

· $155 million Growth Fund which provided an assistance package between 2014 and 2018 to help automotive workers and supply chain businesses and delivered the:

§ Automotive Industry Structural Adjustment Programme- to assist redundant automotive workers find new jobs;

§ Skills and Training Initiative- to support workers build on existing skills and gain capabilities to transfer to new jobs;

§ Automotive Diversification Programme funding- to facilitate automotive supply chain firms capable of diversifying to find new markets;

§ Next Generation Manufacturing Investment Programme support- to accelerate private sector investment in high-value manufacturing sectors in Victoria and South Australia.

One of the companies with its core business in Automotive aftercare and accessories market in Australia is AMA Group Limited (ASX: AMA). With a dedication to offer exceptional customer service, cost­-effective operations, and sector leading brands, AMA has emerged as a leader in the Automotive aftercare and accessories market of Australia. The Company comprises of the business stretching into:

· Vehicle Panel Repair,

· Vehicle Protection Products and Ute/Commercial Accessories (Manufacturing),

· Automotive Electrical and 4WD Accessories (Distribution),

· Automotive Workshops and Performance Products, and

· Automotive Component Remanufacturing.

In a recent business update, AMA Group has shown serious signs of business expansion through acquisitions, management changes, fresh funding facilities and integration of the acquired businesses. Let us now discuss the stock under discussion in some detail.

AMA Acquired Capital Smart and ACM Parts

In contrast to the reducing business operations of the above-discussed companies (Ford, Holden and Toyota in Australia), AMA group recently completed the below-mentioned acquisitions (signifying a total of 10 new sites) in addition to Capital Smart and ACM Parts:

§ Smash Care

§ Diplocks

§ All Transport (trucks)

The acquisitions, funded through a combination of cash and deferred earnout related consideration, are anticipated to contribute approximately $30 million revenue and $2.5 million of EBITDA to the Group upon full integration.

In addition to this, the Company maintained the strength of the acquisition pipeline for AMA with no upward pressure on acquisition multiples. The Company is currently in talks for acquisition opportunities expected to yield $110 million of revenue, along with the pipeline which the Company is presently evaluating represents more than $200 million of revenue.

Due to the significant strategic acquisition of Capital Smart and ACM Parts, the level of “business as usual” acquisitions understandably slowed in the first half, however, the acquisition pace is on track to return to historical levels in the second half of this financial year.

$375 Million New Banking Facility

AMA implemented a new banking facility worth $375 million with Australia and New Zealand Banking Group Limited (ANZ) and National Australia Bank Limited (NAB) in October 2019.

The freshly implemented banking facility, currently drawn on a net basis to around $235 million and underwritten by ANZ and NAB, was formed with a view to assisting in the acquisition of Capital Smart and ACM Parts while also enabling the continuous development of AMA Group.

However, ANZ and NAB in return undertook to syndicate part of the facility to a few new lenders towards the end of 2019.

The syndication process has presently been completed with five additional parties joining the facility as lenders.

The Company is pleased with the syndication being exceptionally well supported and oversubscribed.

Capital Smart and ACM Parts’ Integration and Future Expectations

The Company is of the view that the integration of Capital Smart and ACM Parts is currently proceeding better than expected.

The work undertaken to date by the dedicated integration team is an enabling factor due to which AMA is confident to deliver the formerly identified $17 million of synergies for the entire FY21, with additional synergies expected.

The Company further provided validation to its expectations of full-year earnings contribution (inclusive of synergies) from Capital Smart and ACM Parts in FY21 to be no less than the disclosure made at the time of the announcement of the acquisition.

Moreover, AMA further expects to provide normalised EBITDA (excluding transaction and integration costs) for FY20 between $73 million to $77million.

The Company believes that:

§ The current repair volumes and mix in the Panel Division have been affected by prolonged drier weather conditions in the first half, and

§ The ACAD Division has been impacted by a pronounced year-on-year decline in new car sales impacting the industry.

However, the Company has witnessed an increase in trading volumes which, when coupled with the historical trading trend, compels AMA to expect second half to be consistent with these more recent trends.

The AMA stock was trading at a price of $0.870, down by 1.136 percent (as on 24 December 2019, at AEDT 1:30 PM), with a market capitalisation of $644.03 million.

In long-term, say five years, the AMA stock has increased by 136.97%.

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