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THE performance of Automotive Holdings Group (AHG) over the past decade has come under increased scrutiny from analysts in the wake of AP Eagers’ proposed merger, and some of the assessments suggest AP Eagers could do a much better job of running AHG than AHG can.

Angus Aitken of Aitken Murray Capital Partners, in a bulletin to clients sent to GoAutoNews Premium, said: “We think that deal makes real sense, and let’s face it, who cares what the AHG board thinks anyway, given the value destruction there over a decade.

“Buy APE and AHG; the merger deal is a great outcome.

“I remember thinking in meetings in our past life with AHG, when 70 per cent of the meeting was taken up with discussions about stone fruit in SA or prawns, that the cold logistics business was a giant distraction (versus) their core automotive business and the stock price has been derated enormously over time.

“But I think this is a great result for APE/AHG shareholders. You get the best automotive management team who can run the combined group efficiently.

“Plus, they will clearly exit cold logistics at some point (in the) near term. If that happens in the next few months before this deal closes, then surely AHG could be a special dividend of some kind which APE would also receive the benefit of, given they own 28 per cent of the stock.

“AHG has been an absolute dog of a company over a decade or more and second only to Village Roadshow in being a company that has disappointed over a long time in my view.

“Honestly, when you see the chart (of share price performance), it is hard to argue (that) AHG should continue to be left to its own devices and not run by someone else.

“When a company that owns two per cent of you has outperformed you by 538 per cent over a decade, it makes it very hard for the laggard target to argue they offer some amazing upside as a standalone business.”

Bell Potter told clients there was a 25 per cent upside from $30 million of synergies. The investment firm said: “Very good buying here. Get on board!”

The firm said the merger was “the deal that had to happen”.

“The fact of the matter is that this is going to look like a fantastic deal in 12 months’ time,” it said.

“The synergies will be closer to $30 million or 40 per cent accretive, property sales will be much higher than book value, they will have a dominant market position nationally and an excellent management team. I don’t think that the ACCC will have any issues with the deal.”

The beauty is that APE only has to buy 70 per cent of the company buts get 100 per cent of the upside as the shareholding has not been going through the P&L or being equity accounted.

Bell Potter said:

  1. The deal is 20 per cent EPS accretive at $13.5 million of cost savings – these are audited numbers and just the low-hanging fruit.
  2. EPS accretion of 40 per cent, plus they can get $30 million of synergies, which has always been a loose number thrown around in the past.
  3. Debt – group net core debt will be about $530 million on Ebitda of $380 million.
  4. Property – APE’s land value is on the books at $340 million …. However, Newstead, for example, is on the books at $60-70 million but looks like it will sell for closer to $120 million.
  5. AHG’s logistics business has $127 million of finance leases attached but written down to zero. Suggested value is between $150-250 million, with anything above the $127 million treated as cash. APE management is confident that a sale will occur either pre the deal or soon after the conclusion. There is definitely a market for it.
  6. Debt – the company could be effectively core net debt-free post-land value and a sale of the logistics business…. Expect chunky dividends.
  7. Management – we expect that both Martin and John McConnell will play a role in the new group. John is older than Martin, and we know that Martin has flagged that he will hand over the reins at some point.
    The most likely replacement, in my view, would be current APE COO Keith Thornton. He is very experienced, has been on the journey with Martin for 14 years and has an excellent relationship with CFO (and director) Sophie Moore, who is also quality and has built a formidable finance team. I would fully expect if/when this transition occurred that Martin would remain on for a few days a week and probably stay on as a non-executive. But let’s get the deal done and bedded down first. The current team will be around for a while.
  8. Geographic landscape – the deal provides APE with a very strong footprint in both WA and, most importantly NSW, which it was weak in.
  9. Operating leverage – Don’t forget the margin/operating story on APE versus AHG – the business excluding synergies will do a lot better without logistics and a lot better being run with the APE discipline.

 

Bell Potter said its view is that the acceptances will be faster than expected, logistics will be sold and the market will factor in higher synergies, leading to further price appreciation.

It said that APE (share price) is up 6.8 per cent and the deal will generate 20 per cent growth at worst and could be at least 40 per cent accretive. It said APE should be trading close to $10 in 24 months’ time on that basis or $2.65 for AHG.


AHG has told GoAutoNews Premium it will be making a statement to the ASX on Tuesday and will address these issues then. The company will not be commenting in the meantime.

By John Mellor

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