Ann: AHG H1 FY2019 Results, Appendix 4D and Presentation, page-11

Having read past the headlines, it's easy to see why the result produced mixed reactions.

Some takeaways from my preliminary reading:

1. no interim dividend - I doubt if anyone was expecting one anyway
2. revenues up slightly
3. net debt down slightly + confirmation that banking covenants are not in breach + positive statement about renegotiating facility due in 2020. I also note the statements that debt levels were impacted by abnormal items + the target interest coverage ratios
4. net operating profit + positive operating cash flow + statement that the secondhand car business (easyauto123) will achieve break even in Q4 2019 ( compared to a loss before tax of $6.2 million for the half) - supports the projection for the second half to be better than the first half and for 2020 to be better than 2019
5. costs in most categories were up sharply - the report talks about $23 million in recurring savings identified for FY2020 onwards - they need these but if they are achieved, that will be a good boost to NPAT
6. I have ignored the statements about the rosy future of the refrigerated logistics business - given the directors' track record on this subject, I'm taking a "I'll believe it if and when it happens" approach to this part of the business. That said, it did contribute an increased profit for the half and if they achieve target EBITDA margin of 10% on the same turnover that would add about $6 million to EBIT for each half year ($12 million annualised) which would make a meaningful addition to AHG's bottom line
7. forecast NPAT for the full year of $52-$56 puts AHG on a PE of 11.2 - 10.4x. Given the potential for improvements outlined above + the possibility that the car industry is at a cyclical low (who knows?) this is cheap
8. given debt target levels (which I support) I am expecting either no final dividend (or possibly a small token one)

Conclusion #1: if management can deliver on the cost savings, if easyauto123 starts generating even very small profits and if the new car industry has at least stabilised, then the outlook for 2020 is potentially very good.  That's three big "ifs" but the report makes positive statements on the first two and is more cautious on the third. As mentioned, I have discounted the prospects of the RL business.

Conclusion #2: there is a lot of potential upside from here but it comes with a corresponding measure of risk.