THE listed groups – Eagers Automotive (ASX: APE), Autosport’s Group (ASX: ASG), and Peter Warren Automotive Holdings (ASX: PWR) – all experienced the impacts from increasing stock levels coupled with increasing revenues for the fiscal year ending 30 June 2024 up by 13% for APE, 12% for ASG and 19% for PWR. 

However, despite revenue gains, cost of living pressures, stubbornly high inflation and elevated interest rates have compressed gross and net profit before tax margins across all groups.    

The 2024 financial year has been set apart by record new vehicle sales and a return to pre-pandemic levels of gross profits in new and used car sales margins. CY23 had a strong second half of the year resulting in a record 1,174,876 units in CY23 (excluding heavy commercial vehicles), reflecting a 12.7% increase compared to CY22, according to VFACTS.The first half of CY24 has been the highest on record, up 8.7% from 2023 and 4.4% from the previous peak in 2018. However, June 2024 saw a decline of 4.2% in monthly sales compared to June 2023, driven by weaker volumes in the SUV and Light Commercial segments. 

Encouragingly, 2024 year-to-date (YTD) figures remain on track for a record-breaking year for new car sales, with continued strong demand from fleet operators.

Each of the listed dealership groups have indicated positive outlooks for their used vehicle departments, with volumes all increasing year on year (YOY).

Echoing what we have been an advocate of, the focus on used vehicles presents opportunities to increase margins, through provision of aftersales services.

Steve Bragg

The increased vehicle volume and strategic acquisitions during the period have been vital growth drivers for the listed dealer groups, enabling them to achieve double-digit revenue growth on a YOY basis. 

However, the industry is now grappling with compressed front-end gross margins, prompting dealerships to focus more on higher margin products and services like Finance and Insurance (F&I) and aftermarket offerings to maintain profitability. 

Effective management of major expenses, such as floorplan costs, advertising, employee compensation and rent, has become crucial as dealerships strive to adapt to these new economic realities.

Aidan Cousin

Interest rates are at their highest in over a decade to curb inflation, significantly impacting finance costs, including interest on loans and floorplan, as well as the affordability of consumer finance. 

Despite only one rate hike in the past 12 months, inflation remains well above the Reserve Bank of Australia’s target range, putting pressure on both consumers and dealers. However, we remain optimistic, predicting that new vehicle sales could exceed 1.25 million units in CY24 with profitability decreasing from the pandemic records, however, remaining above 2019 levels.

LISTER AUTO GROUPS – SUMMARY

THE GOOD

Revenue growth

Despite challenges, all three listed dealer groups (PWR, APE and ASG) reported significant revenue growth YOY ($15.62bn combined increase), driven primarily by strong performances in new car sales, back-end services, and parts sales. This suggests that demand, while under pressure, remains robust enough to support top line growth.

Cost management

Effective cost management is a recurring theme, with all companies reducing their operating expense ratios. 

Operating expenses as a percentage of revenue have declined on average by (2.8%) from an average of 13.67% in 2023 to 13.29% in 2024. This focus on cost efficiency is helping to partly offset the impact of declining gross margins, preserving profitability in a challenging environment.

Back-end revenue expansion

Across the board, there has been strong growth in higher-margin back-end services (e.g. service and parts), which has been a key contributor to mitigating/minimising the overall gross margin compression. This area continues to provide a reliable revenue and gross profit streams for dealerships.

THE NOT SO GOOD

Gross Margin compression and NPBT pressures

All companies reported declines in gross profit (GP) margins, largely due to pressures on new car margins due to increased new vehicle stock and cost of living pressures on demand.

Rising costs, primarily driven by increasing interest/floorplan costs due to higher inventory levels have impacted NPBT for all three dealer groups when compared to PCP.

Inventory management challenges

While inventory has been well managed in some areas, the industry as a whole has well and truly entered a period of oversupply.

This oversupply has led to increased bailment expenses and inventory holding costs, further straining profit margins.

Increased finance costs

Rising interest costs associated with higher inventory levels and acquisitions are impacting profitability. The industry has seen increases in interest expenses on average of 56.6% YOY, which is eroding profit margins displayed in the decreases in NPBT margins across all three companies. 

Interest expenses as a proportion of GP has grown on average 45.9%, increasing from an average 6.52% of GP in 2023 to 9.56% of GP in 2024.

THE INTERESTING

Resilience amidst economic headwinds

Despite pressures on gross margins, increased inventory management challenges and rising finance costs, all of the listed companies have managed to sustain growth and profitability above pre-COVID levels. This resilience, even in tough economic conditions, is a testament

to the strength of the Australian automotive industry and its ability to adapt to changing times.

• In an historical context, NPBT levels at June 2024 are relatively strong.

Insurance / Other costs

• Other expenses have noticeably increased across all three of the listed businesses, growing 10.1% YOY on average from 16.9% of GP in 2023 to 18.6% in 2024.

• We suspect that this could be attributed to increases in insurance costs, however due to the fact that ASG and APE do not segregate insurance costs, we are unable to verify this.

• Peter Warren has separated insurance expenses from other costs seeing an increase in insurance of 41.0% YOY in real terms and as a percentage of gross growing 28.6% from 2.3% of gross in 2023 to 3.0% in 2024.

– This is likely attributed to higher inventory days resulting in more stock requiring insurance than 2023.

– It could also be attributed to increases in cyber insurance costs/spending and general insurance cost increases.