Brisbane-based AP Eagers may have won the battle for its main listed rival, Automotive Holdings (AHG) but that doesn’t mean it has been immune from the impact of the deepening slow down in the car sector.
Yesterday’s trading update was all a bit ‘after the event’ from Automotive Holdings (AHG) now that it has fallen on its knees and accepted the paper offer from its biggest shareholder AP Eagers (which owns 28.8%).
The Automotive Holdings Group (AHG) board has unanimously recommended shareholders accept the AP Eagers’ (APE) improved scrip offer of one AP Eagers share for every 3.6 AHG shares. This compares to an earlier offer of one AP Eagers share for every 3.8 AHG shares.
The trading update reflected tougher market conditions and a softer-than-expected outcome for Automotive Holdings in the year to date. Morgans suspects this reflects a more conservative accounting treatment by AP Eagers, softer new vehicle sales, and underperformance by Automotive Holdings.
Morgan Stanley upgrades to Overweight from Equal-weight, believing an opportunity now exists to buy a quality operator at cyclical lows. AP Eagers has become bigger and more relevant now it has merged with Automotive Holdings.
Morgan Stanley has lowered forecast earnings for AP Eagers by -5-10% and for Automotive Holdings ((AHG)) by -14-17% due to lower commissions, lower organic growth expectations based on falling vehicle sales and sentiment around wealth effects. The broker sees house prices declining -10-15% from their peak, and thus vehicle sales -6%.
AP Eagers’ result was in line with guidance upgraded last month. Organic growth was impressive, the broker suggests, complemented by acquisitions. Auto margins held up well despite cycling last year’s boost from Qld hail storms.