Ann: AHG RESPONSE TO MEDIA SPECULATION-AHG.AX, page-7

Automotive Holdings Group more than the sum of its car parts

• STEPHEN WOOD
• The Australian
• 12:00AM November 15, 2016
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Automotive Holdings Group is one of the leading automotive retailing companies in Australia, with an industry-leading market share of about 7 per cent.
Listed on the ASX in 2005, AHG began as a Holden dealership in Perth called City Motors. Since then the business has expanded in WA and across the nation and currently represents nine of the 10 top-selling volume brands.
It has a small exposure to truck brands, as well as Mercedes-Benz in the luxury space.
While industry growth rates are low — about 2 per cent — compared to GDP growth, AHG is actively looking to grow market share via acquisitions, taking advantage of the current fragmented industry structure. These acquisitions are earnings-accretive due to the relatively lower acquisition multiples of target companies and availability of synergies.
The company also operates a refrigerated and cold storage businesses, contributing 13 per cent to overall group profits. This business has arguably underperformed over many years, with the operations requiring large levels of capital expenditure, while margins continue to be competed away, resulting in declining return on assets. Return on assets has fallen from 20 per cent back in 2009 to be sitting closer to 5 per cent this year.
But the recent change in management should a catalyst — some businesses may be sold, with available capital used within its core competency of expanding its automotive dealing business.
The key risk is the current ASIC inquiry into income derived by dealers via finance and insurance products, which is likely to be a near-term headwind to earnings.
Having said this, dealerships have multiple revenue streams available to them and can likely partially offset the potential headwinds to earnings.
Further to this, the recent sell-off in the share price from $5.00 in late August to a current prices around $3.80 suggests at least part of this risk is factored in to the share price already.
AHG currently trades well below our sum-of-the-parts valuation of $4.60 and offers an attractive fully franked annual yield of 6.3 per cent.
Automotive Holdings Group Ltd
ASX code: AHG
Share price: $3.80
Industry: Retailing
Consensus forecast FY2017 Dividend: $0.24
Stephen Wood is a senior analyst at Clime Investment Management. Clime Investment Management holds shares in AHG.