Dealership group Eagers Automotive (ASX:APE) recently announced a strategic 65% investment in CanadaOne. The $1b investment is the Company’s first major international expansion and provides a strong growth opportunity. However, mixed trends in the new vehicle sales market, margin pressure and uncertainty about the likely success of such a large acquisition have impacted sentiment towards the shares.

We researched Eagers Automotive in The Dynamic Investor earlier this month to assess whether the recent weakness in the shares presents an entry opportunity.

About Eagers Automotive

Eagers Automotive is the leading automotive retailer in Australia with a ~14% share of the new vehicle sales market. APE is the largest dealer for 13 of the top 20 brands in Australia. The core business is the ownership and operation of motor vehicle dealerships and the Company now has 224 new car dealerships across 33 brands and 68 truck and bus dealerships across 12 brands in Australia.

The Company also has a presence in NZ with a ~8% share of new vehicle sales through 13 car dealerships across six brands. APE also recently made its first foray into a new international market via the acquisition of a 65% stake in CanadaOne Auto which is one of Canada’s largest dealership groups.

Key Fundamental Drivers

Well Leveraged to Strong Electric Vehicle Demand

Total new vehicle volumes declined by -2.3% in May 2026 and are -1% for the 2026 year-to-date (YTD) compared to the prior corresponding period (pcp). Behind these headline numbers, Electric Vehicle (EV) demand continues to partially offset total market weakness. Volumes in key brands BYD and Tesla reached the highest month volumes to date in May 2026. The market shift to increased New Energy Vehicles (‘NEVs’ – i.e. Battery Electric Vehicles (BEV) and Plug-in Hybrid Electric Vehicles (PHEV)) evident in March/April continued in May 2026. NEVs accounted for 46% of new vehicle sales in May 2026. Most BEV models have current order backlogs (~2-3 months).

APE remains a net beneficiary of the ongoing market disruption caused by the trend in strong EV demand, via its over-exposure to BYD (+155% in May 2026 vs the pcp). Further, proposed changes to Fringe Benefits Tax (FBT) are also expected to benefit APE.

The offsetting trend is that there is significant weakness across traditional brands without a strong BEV offering. For example, Toyota is down -24.6% in the YTD, with Toyota not expected to meet its 2025 sales outcomes. Elsewhere, brands such as Nissan (-32.8%), Mitsubishi (-26.4%) and Subaru (-22.1%) have also reported significant declines. Each of the abovementioned-brands are within APE’s top brands by dealership share.

Margin Expansion Expected to be Incremental

For the 12 months to 31 December 2025 (FY25), APE reported underlying margin of 3.3% relatively flat compared to FY24. In context, APE continues to outperform industry average with margins +2.1% ahead of the industry benchmark in FY25. APE sees continued margin upside given ongoing execution of the Next100 Strategy. The latter focuses on leveraging scale, digital innovation, and strategic partnerships.

APE continues to deliver impressive cost discipline, driving a record low operating costs-to-sales result of 12.1% (13.0% in FY24). This has offset pressure on Gross Profit Margin (GPM) on new vehicles. The latter is driven by GPM compression for legacy brands, as there is currently excess inventory for larger vehicles. On the other hand, in-demand vehicles such as NEVs (which comprise a smaller portion of sales) continue to attract high GPM.

The GPM pressure on new vehicles is likely to have passed through the trough, with the supply/demand dynamic having largely normalised. However, higher inventory levels as well as higher interest costs are likely to place pressure on APE’s underlying margin over the medium term.

Balance Sheet Provides Scope for Further Acquisitions

APE’s current gearing (on a net debt to EBITDA basis) is very low, at 0.18x. Gearing is expected to trend upwards as a result of settlement of the CanadaOne acquisition and further acquisitions since 31 December. However, gearing is expected to remain relatively low, thus providing balance sheet capacity to pursue further Merger & Acquisition (M&A) opportunities.

The Company is likely to target M&A opportunities in the Canadian market (via CanadaOne) and its alliance with Mitsubishi Corporation. The Canadian market is more fragmented and offers structurally higher margins.

To this end, the Company has a strong track record in integrating scale acquisitions while continuing to improve the underlying business model.

Fundamental View

The Company has two main growth avenues. The first is the CanadaOne acquisition, which provides a significant market consolidation opportunity in the more profitable Canadian market. The second is surging demand for NEVs (in particular BYD to which APE is highly leveraged) supports further growth in domestic market share. Together, these opportunities underpin the attractive EPS growth profile of +13% over FY25-28 on a CAGR basis.

However, there are 3 factors which are holding back the share price:

i. APE shares are currently trading on a 1-year forward P/E multiple of ~18.5x, which is above the long-term average of ~15x and towards the middle of a wide trading range over the last three years (~10x – 30x)

ii. Margin expansion is limited, as improved cost performance and strong EV sales are being offset by GPM compression for legacy brands (which comprises the majority of sales).

iii. Continued weakness in legacy brands is likely to continue given the ongoing shift to EVs, as well as pressure on discretionary consumer spending.

Charting View

APE has been trending lower since peaking in October. It made a new low for the year a few weeks ago and bounced strongly, but it is once again experiencing selling pressure into the rally. At the moment the risk is still to the downside. For the chart to look positive, we would need to see a push above $25 over the next several weeks.

 

Michael Gable is managing director of Fairmont Equities.

 

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