SUTTONS’ purchase of a major stake in listed rival Peter Warren Automotive could not have been timed better, arriving at the same time as Pitcher Partners Sydney’s Motor Industry Services published its listed automotive dealer comparison.

The comparison between listed dealers Eagers Automotive (APE), Autosports Group (ASG) and Peter Warren Automotive Holdings (PWR) covers COVID-19 and supply shortages but also focuses on the relationship between performance and acquisitions – the centrepiece of the private family company Suttons’ $50 million share acquisition in PWR.

In examining the listed auto players, Pitcher Partners MIS team, headed by Steve Bragg, specifically stated that “consolidation of the market will heat up as the big continue to get bigger. “

“In our view, in order to compete in an EV and agency era, the major players will need to increase their size to at least $3.0b in revenue with efficient operating expense management and optimal capital structures,” the report said.

“This will mean that as the industry transforms and supply returns, there will be many dealer groups looking at their succession plans.”

The three listed companies have a strong history of acquisitions. PWR in the past year purchased Penfolds Motor Group, Tweed Mazda and Collins Honda and then bought a Southport property for $2 million and succeeded in a $96 million debt facility.

In FY22, APE bought 14 dealerships and 10 properties in the ACT – its first entry into that territory – for $205 million; eight dealerships and one property in Adelaide; and in NSW, Kelly Trotter (Cardiff) and Heritage Motor Group (Maitland) and three properties; and opened three new Easyauto123 used-car sites with three additional sites planned for this calendar year.

ASG bought John Newell Mazda; Suttons Subaru and Kia; and in New Zealand, paid $NZ68.9 million for Auckland City BMW comprising two BMW dealerships, two Mini dealerships and the country’s sole Rolls-Royce dealership. It also bought property at Bundoora and Alexandria.

Pitcher Partners said in its report that the listed dealerships had “so far weathered the COVID-19 pandemic and supply shortage ‘Chipdemic era’ with relative ease”.

“Revenues and volumes may be down on pre COVID-19 levels (2019) but gross margins are elevated and profits are double and triple what they have been in the past, up to 3.43 per cent (profit % on sales, PoS) – a 6.84 per cent improvement on the previous corresponding period (pcp),” it said.

In terms of sales, Pitcher Partners noted that new-vehicle sales in the six months to June 2022 were down by 5.2 per cent in comparison to June 2021 (Vfacts) which is “a significant 11.1 per cent decline since June 2018.”

“That’s 67,000 less new vehicle sales in only the first half of the year for the Australian market,” it said.“Despite this, the automotive reporting season was dominated by commentary around the improved performance by previous acquisitions, as well as the listed companies’ plans to continue to grow in a supply constrained market.

The report said: “With most analysts not expecting the supply issues to be resolved in the coming year, how do the big listed groups get bigger without overpaying and over capitalising on dealership assets trading at inflated earnings?”

“Throw into the mix the two biggest disruptions to dealerships in the last 100 years; Electric Vehicles (EVs) along with the significant infrastructure spend that is required plus the agency sales model, the future is a bit cloudier and more uncertain than the relative sunshine (and profits) of today.”

But for the year ahead, Pitcher Partners sees volumes “largely in line with the unit volume sold in 2019 – 1,062,867.”

“Interestingly, but not unexpected, is the level of order bank that the three listed companies are continuing to build.

“APE has seen their order bank grow approximately 330 per cent since December 2020, PWR is up 98 per cent since June 2021 and ASG is writing 25 per cent more orders than delivery, approximately equal to a 4000 new-car increase in ASG’s order bank.

“Going forward, what is most interesting is what will come first – loss of orders as consumers cannot afford orders placed over six months ago or sufficient supply increases to satisfy demand whilst market conditions are still buoyant.”

Pitcher Partners also said the agency model – now adopted by Mercedes-Benz and Honda and hinted at by other OEMs – was difficult to quantify.

PWR, in its FY22 financial statement, said that the revenue impact of the agency model – based on agency vehicles sold in the year – for its exposure to Mercedes and Honda was $60 million.

Pitchers said that “what is abundantly clear, however, is that whatever shape or form an agency agreement takes, it must result in a win-win-win situation.

“The consumer needs to win by having a better overall purchasing experience, the car brand needs to win by getting more customer access, more control of the sales process and more margin, and the dealers need to win by maintaining their business profitability and being able to continue to service their local community.”

To read the full ‘Australian Listed Dealer Comparison 2022’ report, click here

By Neil Dowling