* It has become easier of late for insurers to be able to write-off cars than it has been in the past (reducing repair work volume)
* With an average vehicle age of 10 years in Australia (according to ABS statistics) the benefits of new collision avoidance system features in newer cars (e.g. lane marker sensors, smarter cruise control which detects the speed of the vehicle ahead and can slow the car down to increase a safe travelling distance, ability to automatically apply breaks if a front end collision is detected, etc.) is still working its way through the Australian private passenger vehicle fleet. These benefits will continue to reduce the incidence of accidents / reduce their severity
* Insurers decisions on write-off v repair will always act as a ceiling to industry revenue growth - it won't be easy for the likes of AMA etc. to push increased prices onto insurers even when consolidation is complete
* Once industry consolidation is complete the majority of growth would come from efforts to squeeze out more GM% by reducing COGS costs (e.g. use of non-genuine and second-hand parts) and greater opex efficiency through economies of scale than growing top-line revenue. Effort would be on making other competitors uneconomic to take their market share, rather than to grow revenue through price increases. If you review the CGU impairment testing notes in the FY16 accounts you will see assumed growth has been set at 0% for all CGUs
* I've read analyst reports stating AMA would eventually get to a 200 shop footprint once consolidation is complete giving them a ~15% share of the market
* In two years AMA have grown shop numbers by ~60 with 40 of these coming from Gemini. This means the other 7 transactions have provided 20 shops (average 3 per transaction)
* The SP probably assumes roll-up in the near future as being similar to the roll-up rate of the recent past. I don't see that as being possible (~30 per year) in a highly fragmented market unless they increase the number of businesses they try to integrate every year (which increases integration risks)
* The other issue with roll-up is as their shop footprint grows the number of viable M&A deals shrinks due to overlapping geographic coverage as well as the industry contracting at the same time (from 3,500 shops presently to about 1,000 to 1,500 shops in future)
Possibly shrinking EV/EBITDA multiples for acquisitions will occur in future, as competition from Gemini for businesses has been removed, providing a margin of safety for integration risk. However I think the SP has factored in a lot of the future shop growth already.
12 months ago (with a sub-80c SP) the business was a steal but I can't see SP growth being as easy in the future as it was in the recent past. I just see their being better investment value elsewhere. I also note that one of the earlier investors, Thorney Opportunity Fund, is no longer a substantial holder.
AMA Price at posting:
$1.02 Sentiment: Hold Disclosure: Not Held
(20min delay)
