CANACCORD note

AMA Group Limited

Specialty Retail | Company Update

Option worth pursuing



AMA-ASX | Price A$1.08 | Market Cap A$528M

BUY Unchanged

PRICE TARGET A$1.27 Unchanged



AMA has acquired a 17.77% interest in Auto Solutions Group Limited (ASX: 4WD, Not rated) for $2.7m. Auto Solutions Group was established in 2016 to consolidate eight business associated with the manufacturing, supply and fitting of four-wheel drive ('4x4/SUV') aftermarket parts and accessories. 4WD's initial portfolio of eight businesses listed with a market capitalisation of $50.3m, which represented a prospectus FY17 EV/EBIT of 7.2x based on pro-forma FY17 EBIT of $6.5m.

We note AMA's investment in 4WD comes on the back of the company recently providing a material downgrade to prospectus forecasts, while a number of the businesses within 4WD's portfolio are relevant to AMA's 'non-panel' operations.

4WD guidance downgraded on 26 April 2017: 4WD provided guidance recently that 2H17 revenues would now be $15 - $16m (prospectus $21m) and EBIT $0.8 - $0.9m (prospectus $3.3m), which at an EBIT level represents a shortfall of 85% against prospectus forecasts.

Rationale for AMA's interest:

·AMA understands a number of the businesses within the 4WD portfolio, and the product/capabilities of a number of those businesses would fit well within AMA's non-panel operations.

·AMA has acquired its interest in 4WD at a +70% discount to its IPO price of $1/share, and with 4WD's CEO also recently resigning, the business can be reasonably expected to be amenable to the assistance of a significant and credible partner to help reset the business for improved performance.

·AMA operations outside Panel being Protective Products & Accessories, Automotive Electrical & Cable Accessories and Automotive Component Remanufacturing could all benefit from acquisitive growth if the right opportunity presented itself.


Financial Impact: we see AMA's initial $2.7m investment in 4WD representing optionality at the moment, and given 2H17guidance by 4WD for EBIT of $0.8 to $0.9m, we see the impact as being largely negligible at this stage.

Our medium-term forecasts are effectively unchanged as a result of the equity investment.

Recommendation & valuation

We remain positive on AMA and confident that the group is continuing to deliver on its panel expansion strategy, while being nimble and astute enough to identify additional expansion opportunities should they arise.

We retain a BUY recommendation and target price of A$1.27. Our target price is based on a DCF valuation methodology (WACC: 9.7%; cost of equity 10.5% and termin