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Companies
Motor vehicle aftermarket ready for consolidation
Trevor Hoey, July 23 2007
Record new motor vehicle sales figures were recently released for the 2006-07 year, triggering strong share price performances from companies like Automotive Holdings Group, AP Eagers and Adtrans.
Robust sales growth has been occurring over the last three years. With more cars than ever on the road, businesses that service the existing car market, or the aftermarket as it is referred to, are experiencing strong conditions. The aftermarket motor vehicle industry is fragmented, and generational change along with some other factors are driving consolidation in a number of areas that have traditionally operated as clusters of small privately owned businesses.
One of the more established aftermarket manufacturers and producers is ARB Corporation (ARP). The company has been established for more than 30 years, but really came to prominence as a listed company between 2000 and 2005. During this period there was strong growth in four wheel drive sales, ARB’s key market for the distribution of its wide range of parts and accessories. ARB products include bull bars, canopies and roof racks as well as mechanical devices such as winches and suspension systems.
ARB’s share price increased more than four fold between 2000 and 2004 hitting a high of $4.40. Higher oil prices have undermined four wheel drive sales, slowing ARB’s growth in recent years. But management has identified new geographic markets and tailored its product range to cater for the growing shift toward sports utility vehicles.
Exports accounted for about 35 per cent of group sales for the nine months to March 2007 – exports to the United States represented nearly 20 per cent of sales. While sales growth is expected to be strong in the US, the strengthening in the Australian dollar has a dilutionary impact.
In Australia, ARB has 24 stores, 15 of these are operated as franchises. ARB has also made acquisitions to provide sales growth and to establish a position in markets such as Western Australia that have a high density of four wheel drive vehicles.
Consensus forecasts for 2007-08 indicate that ARB should achieve earnings per share of 27 cents, representing a P/E ratio of about 15 based on the company’s recent trading range.
Allomak (AMA) only listed on the ASX in August 2006 and while it is much smaller than ARB with a market capitalisation of about $50 million, the company operates in niche aftermarket areas that are primed for strong growth as a result of consolidation. The take up of new well sought after equipment such as LPG conversion kits should also generate earnings growth.
Allomak’s businesses include Dyno Dynamics, a world leader in the development of dynamometers and the market leading provider of automotive diagnostic equipment in Australia. Fluidrive is another one of Allomak’s divisions. The business is the leading manufacturer of international accredited automatic transmissions in Australia.
Dyno Dynamics and Fluidrive along with the Autolac business provide a reliable revenue stream as they target markets that are not influenced by cyclical trends, but by the need to maintain, repair and replace motor vehicle equipment.
Autolac is one of Australia’s largest distributors of automotive paint and consumables to the smash repair industry – once again a non-discretionary source of revenue. In July, Allomak purchased Mr Gloss Holdings, marking the start of a move to grow a national smash repair business, and one that should complement the Autolac operation.
Allomak has made four other acquisitions since listing on the ASX, resulting in an earnings update by management in July. Consequently earnings before interest and tax in 2007-08 of $10 million are expected, 70 per cent above prospectus forecasts for 2006-07. This suggests earnings per share should be in the vicinity of seven cents, suggesting that the company’s prospective P/E ratio of about 9 is conservative relative to its growth profile.
More articles from this week's newsletter:
A comeback for futures trading
A trade explained: biotech frenzy
The rise of the moral investor
Weapons of wealth destruction
Stock of the week: ANG
Wine still a little sour
Forex: managing volatility
Energy stock correction
USD/AUD: rollercoaster to parity
Whatever your views, you can discuss this article - or any of Trevor's articles - on our message board Your 2 Cents.
Trevor Hoey is one of Australia's leading finance journalists, having written for Shares, Personal Investor and BRW magazines. Trevor's broad contact base enables him to find out - and report on - the real story behind what's happening at Australian listed companies. Trevor writes for the Australian Financial Review and AFR Smart Investor magazine.
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