eureka report write up

AMA chief’s double plan
BRENDON LAU
6 NOVEMBER 2013

Summary: Ray Malone, the chief executive of automotive parts and services group AMA, has orchestrated a seven-fold increase in the company’s value since 2009 and aims to double earnings over the next four years.

Key take-out: Malone’s plans are not reflected in the current share price. Consensus estimates have only pencilled in a 24% increase in earnings before interest and tax to $11 million over the next three years.

Key beneficiaries: General investors. Category: Shares.
Recommendation: Outperform.

Meet Ray Malone. He is aiming to double earnings for AMA Group (AMA) before he steps down as its chief executive in four years, and he’s leveraging his autism to help achieve that – a disability he was diagnosed with in 1998 by Monash University’s Krongold Centre.

The strategy has paid off so far, with the stock recording a more than seven-fold increase in value as earnings before interest and tax (EBIT) moved from a loss of $6.7 million to a positive $9.2 million since Malone ousted the board and took over the reins of the automotive parts and services group in 2009.

“Doubling earnings is easy and I’ll tell you how I am going to do that,” Malone tells Eureka Reportconfidently. “We will get 30% organic growth and the acquisition of Custom Alloy will add 15% [a year].”

He only has to make a few smaller acquisitions or one large one to hit his goal, by his calculation, and there are no shortage of targets in the fragmented market covering panel beating, automotive servicing, bull bars and auto components.

If anything, bull bar manufacturer Custom Alloy marks the first in what is likely to be a series of acquisitions in the coming years now that AMA Group repaid all its debt in August. The group had almost collapsed under the weight of its debt in 2009 as the previous managers witnessed the company’s shares collapse to around 3 cents by the end 2008 from $1 the year before.

Malone was the general manager in the panel beating division back then, and he successfully staged a coup in an attempt to save the sinking ship. This isn’t the most intriguing part of the man.

You can’t tell that he has autism just by listening to him. Malone is a straight talker and doesn’t seem to have much trouble communicating like some autism sufferers, although his compulsion to do things in a set way, fascination with detail and preoccupation with his 15-year written plan that governs both his personal and business life, gave him an edge in turning around AMA Group.

He not only spearheaded negotiations with Westpac Banking Corporation that saw the bank take a 25% haircut on AMA’s $34 million debt and set up an interest-free loan facility, but he instituted a business process across the disparate group to get it back to profitability.

This from a man with little formal education and who had a disadvantaged childhood. Malone was orphaned at 11, and had to be split from his siblings and left to fend for himself by 16 when his uncle didn’t want to look after him anymore. Malone took up a spray painting apprenticeship and worked 100 hours a week to support himself.

“What’s my secret? I’m just an optimistic person,” explains Malone when asked about how he overcame the odds. It’s always that simple with Malone. There were no business terms, management speak or clever strategies in his answers.
Investors have reason to feel optimistic too. Malone’s plan to double earnings is not baked into the share price. Far from it, in fact, as consensus estimates have only pencilled in a 24% increase in EBIT to $11 million on the back of a 19% lift in sales to $75.3 million over the next three years.

There’s plenty of room for AMA to grow. Malone estimates the total auto parts and services market is worth $8 billion to $9 billion, and panel beating alone takes up around a third of that.

The smash repair market may be over-serviced as auto insurers have started operating their own workshops to handle claims, but the pressure is expected to ease by 2014 or 2015 as smaller operators are forced into liquidation.

AMA is well placed to ride out the storm and even benefit from the turmoil. Its workshops are certified by all the major insurers, except for Suncorp Group (which owns AAMI), and the group has enough financial muscle to participate in the consolidation of the industry.

What is also surprising is that the well-documented troubles afflicting Australian manufacturing is not having much impact on AMA’s local bull bar fabrication business. This business is the most profitable division in AMA’s stable and accounts for 31.8% of group sales.

Malone has so far been over-delivering on his promises and if we give him the benefit of the doubt in regards to his plans to double earnings in the next two to four years, the stock will end up significantly higher than where it is today at 37 cents.

The celebrated chief executive wants this goal to be the crowning moment in his career, as he claims he is on his last contract as the head of the group.

The next step in his 15-year plan is to transition to become AMA’s chairman or non-executive board member. AMA’s chief operating officer, Ray Smith Roberts, to being groomed to succeed him.

We have a new “outperform” recommendation on AMA.