@bensterz,
Thanks for your comprehensive posts, which I think are very useful for people who own this business or who, like me, are researching it with a view to buying it.
If I can summarise what you are saying, I believe it would go something like this:
1. The vehicle repair industry is not growing; in fact, the opposite: it is contracting.
2. Industry profitability is under pressure, due to structural reasons.
3. AMA will struggle to find more good acquisition opportunities.
4. When the roll-up exercise is completed, AMA will trade at far lower valuation multiples.
On Items 1, 2 and 4, I largely agree with you.
In fact, it is expressly Items 1 and 2 that are the very reason for someone like AMA to come into existence in the first instance.
There is significant precedence for consolidation occurring in highly fragmented economic sectors that have poor industry structure, such consolidation acting to increase efficiencies by eliminating layers of duplicated fixed overheads.
This is consistent with rudimentary economic theory.
One aspect (in relation to Items 1 and 2) where I do, however, disagree with you is in relation to your view seemingly to be that the industry is in bad shape being a negative consideration for investing in AMA. My opinion on this is quite the opposite: a tough operating and business environment with a shrinking pie play straight into the hands of the industry consolidator(s).
In terms of Item 4, I think that - based on the sorts of valuation multiple de-ratings I have witnessed in the past when roll-up strategies mature, an EV/EBITDA multiple of around 7.0x to 8.0x seems appropriate and reasonable for a business with no top line growth, but with high ROE characteristics, such as AMA.
But it is on Point 3 where I can't reconcile your view with some of the industry stats: you seem to be implying that the acquisition game is largely done for AMA, whereas I think still has some way to run. AMA operates some 70 facilities, out of an industry population of 3,500. Of course, not all of those 3,500 are able to be acquired for a host of reasons, but even if one-tenth of those are, then AMA still has some considerable opportunity ahead of it.
Put another way, this a ~$5.0bn industry; of which AMA represents just $300m.
Any way you look at it, AMA is a bit of a minnow. I note that AMA didn't even have any presence whatsoever in the NSW market pre-Gemini (and even Gemini brought with it only 5 centers in the whole of NSW)
You are also concerned about the prospect of further equity raising; however, given that that there appears to be a dearth of any more large scale Gemini-type deals to be done, the small (say, 3 or 4 shop) acquisitions can easily be funded organically.
And, besides, I strongly suspect, if a large-scale acquisition opportunity became available and it required additional equity capital, based on the apparent success of the Gemini deal, that it would be received most favourably by the market
[*]
So, unlike your reservations, I observe there to still be ample scope for ongoing consolidation to be led by AMA.
So that's not what concerns me.
What does concern me (a bit like you I think I read you comment somewhere) is the pace at which the ongoing roll-up occurs, without AMA management sacrificing acquisition discipline or being sloppy in terms of executing on integration plans.
For context, here are some numbers I've been playing with:
Assuming the following:
- AMA gets to 30% of the market (i.e., around $1.0bn in Revenue)
- EBITDA and EBIT margins of 15% and 13%, respectively (i.e., no improvement from current levels despite improved future scale benefits)
- Exit EV/EBITDA multiple (i.e., when roll-up strategy matures) of 7.5x (arguably not that demanding)
- Number of years to reach Revenue of $1.0bn = 3
- Maximum Net Debt-to-EBITDA = 1.0 times
On those assumptions, the Year 3 situation looks like this:
Revenue: $1.0bn
EBITDA: $150m
EBIT: $130m
NIBD: $150m
Enterprise Value = ~$1.12bn
Market Cap = $970m
=> Upside from current share price = 100%
=> Annual Investment Return = 26%pa, which,
prima facie, appears most attractive.
Of course, it might take a bit longer than 3 years to get to the end point, but even if it takes
5 years, the Annual Investment Return works out to a a still-appealing
15%pa.
And even if one assumes a pretty significant margin fade over time (which would be at odds with benefits from economies of scale and synergy gains that accompany industry consolidation), but even if EBITDA and EBIT margins ended up being 12% and 10%, respectively, that would result in terminal EBITDA and EBIT of $120m and $100m, respectively, and the share price upside would be a still-acceptable 55%, for an Investment Return of 16%pa (over 3 years) and 9%pa (over 5 years).
And, apart from management not losing patience and doing anything silly, I'm not sure that there are too many business or tactical risks that might de-rail the roll-up strategy.
So, on a risk-adjusted basis, the investment returns on offer look attractive to me.
Indeed, the downside risks seem quite limited compared to the upside potential if things go to plan: the worst-case, as far as I can see it, is that they aren't successful in acquiring anything further, in which case I suspect the stock de-rates to around a market multiple (that corresponds to a share price of around 80c to 85c). But as I've tried to argue, the chances of the roll-up game now being over for AMA, I think, are slim (less than 5%)
So the way I see this situation is a 40% chance of doubling one's money over the next 5 years, a 30% chance of a doing it over 3 years, a 25% chance of a 50% upside over 3 years... all compared to a 5% chance of a 15% to 20% reduction in the share price.
Of course, don't get me wrong, it's not all beer and skittles with this company; there are few things that provide a source of niggle, which have to be addressed in order to get completely comfortable with the investment thesis:
The first is the quality of the financial statements which are, at best, incredibly messy and confusing; and at worst, they are a dog's brekky, requiring a huge amount of forensic accounting effort to decipher, especially in the context of the acquisition accounting and the inordinately long list of items claimed by management to be "one-offs" in their representation of "underlying" earnings.
The second thing I've not yet quite got my head around is the people at AMA who are driving the roll-up; how disciplined they will be able to remain in the face of market pressure for them to continue doing deals. I've never met them, nor heard them articulate their ethos around shareholder value preservation at all costs.
So, in closing, I hear what you say, and I think it provides valuable content to cause some pause for thought, but, respectfully, I think you might be a bit too focused on the here and now, and not the multi-year profile which, I believe, is what one has to do when dealing with these sorts of long-dated corporate strategy outworkings.
Again, thanks for your constructive contribution.
Adam
PS. I note you referenced Thorney and what they were doing. For mine, I have years ago learnt to not take my investing cues from what others do, no matter how well-credentialised they are. Because no one bats 100 all of the time. Besides, often investment institutions buy and sell stocks for all sorts of technical reasons that have little or no real bearing on how they truly view the fundamentals of those stocks.
So, instead of being influenced by the actions of others, I far prefer to establish my investment view and my degree of conviction based on my own independent research and insights.
[*] In fact, it would come as no surprise to me if AMA ended up acquiring or merging with Suncorp's auto repair business at some stage down the track. The reason I say this is because this activity is not a core business for Suncorp... the only reason they are in it in the first place, I believe, is for reasons of efficiency and trust, something that a larger, responsible and ethical corporate entity such as AMA would readily provide. And, being part commercial bank, we know that the regulatory environment is tightening around capital adequacy requirements for banks, meaning that Suncorp, like all banks, will be looking around their bloated business for sources of capital in coming years.
(20min delay)
