Automotive Holdings Group (ASX:AHG) is a diversified automotive retailing group. The Company is Australia’s largest automotive retailer, with operations in NSW, Queensland, Victoria, WA and NZ. The Company has over 184 franchises at 111 dealerships across five Australian states and NZ, selling passenger and commercial vehicles as well as trucks and buses.

Automotive Holdings Group recent announcement

In late November this year, AHG entered into an agreement to sell its troubled refrigerated logistics division. This means that the Automotive aspect of the business is now the only business. The announcement was met enthusiastically by the market, for a number of key reasons.

Why this news is a positive for AHG

Firstly, despite an extensive ‘transformation program’ for the refrigerated logistics division, designed to reduce costs and improve productivity, earnings for the division continued to slide. They declined in both FY16 and FY17. Secondly, the refrigerated logistics division was absorbing capital generated by the Automotive division. The Company could have used this capital in the consolidation of more dealerships. It was therefore generating a return on investment that was still below that of the Automotive division, even accounting for cost savings being achieved. It is estimated that the sale of the refrigerated logistics division would generate significant capital (around $300m) which can be deployed for further acquisitions and greenfield developments in Auto.

The challenges

But it seems that the Automotive division is not without its challenges. AHG has a significant exposure to the new vehicle sales market in Western Australia, which has been struggling. While AHG’s exposure to WA means that the Company is well leveraged to an eventual cyclical recovery in that market, trading conditions remain patchy. Further, the Automotive division has been impacted by regulatory changes to insurance income. This means that the business model for dealerships is changing to one that is less reliant on large commission benefits from finance and insurance products.

New vehicle sales to continue to grow, assisted by interest rates remaining low. The current financial performance does not reflect this however – operating earnings for the first four months of FY18 (-3.1%) are tracking behind guidance for a modest uplift on FY17, as the above-mentioned headwinds continue to impact.

Do we buy AHG?

The stock is now trading on an undemanding P/E of around 13x, despite its recovery following the announcement of the refrigerated logistics sale. Because of the challenges mentioned above, it may be wise to take a more cautious view.

From a charting point of view, the shares had been trending lower since August, finally breaking that downtrend in November. News that the refrigerated logistics division was sold saw the shares gap higher, and have been creeping higher since. However there is strong resistance at $3.90 and again at $4, which makes upside from here very limited.

Given the challenges that still remain, we would ideally like to see Automotive Holdings Group test these resistance levels and spend a bit of time consolidating. This means that there is no rush to buy the stock just yet but an opportunity could emerge in a few months from now.

Current share prices available here.

You can learn more about technical analysis in this article.

 

Michael Gable is managing director of Fairmont Equities.

Sign up to our newsletter. It comes out every week and its free!

Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.

Like this article? Share it now on Facebook and Twitter!