Each week I’ll be picking a random ASX stock that I’ve rarely seen discussed online – and that I do NOT hold – that you voted for, for us to dive into for some Due Diligence (“DD”).
This is for us to have a look at what it does, comb over their financials, and conduct some polling on general sentiment. Not all of these stocks may be sexy or appealing; the whole point is to shine a light on what companies are doing out there on the ASX which never get much coverage – for good or bad.
The main purpose being to add some more variety in coverage to the standard blue chips or meme stocks we see pumped day in and day out, and hopefully discover some hidden gems or innovative companies on the Aussie market.
Here’s this week’s Random Stock of the Week.
Company name: Autosports Group
Ticker: ASG
Industry: Automotive Retail
Headquarters: Leichhardt, NSW
Market cap: ~$380m
Current share price: ~$1.88
P/E ratio: ~9
1-year Performance: +2.73%
What they do, smoothbrain version: Where Lambo? Here Lambo.
What they say they do, wanky version: “More than selling cars; while Autosports Group is best known for our landmark new car showrooms, we have a less visible but no less important side to our business in service, parts and prestige/luxury used cars.” 🍆👋
What they do, actual version: Quite simply; they sell new & used cars across a bunch of dealerships across the country, then charge people to keep those cars running smoothly and make quite a lot of bank off it – particularly in the current climate.
Autosports Group (ASG) are an automotive retailer, parts & servicing company that operate over 40 dealerships across Australia, as well as a handful of used-car outlets and collision-repair facilities.
The company sells a wide range of car brands, mostly oriented around the mid-to-high-end of town. They sell vehicles from the likes of Aston Martin, Audi, BMW and plenty of others even including – yes – Lamborghini.
ASG derives the bulk of their revenue from car sales & financing, however they also make a significant amount of coin off the servicing and selling of parts for these vehicles as well.
As of their most recent messaging to the public, the company is targeting a profit split of 55% from car sales and 45% from these other “back-end” services, with the latter actually providing the better margins of the two for the business.
In addition to the inventory of cars they sell, much of ASG’s asset profile comes by proxy from real estate. That’s because they continue to acquire new dealerships which sit on significant sized lots, which in turn grow in value as real estate prices have blown up.
Simply put: the company is an acquisition-beast, having acquired a ton of new dealerships in flagship locations throughout their listed history, allowing them to bring on additional brands to now cover pretty much all of the major “luxury” car brands available to consumers.
The company IPO’d on the ASX back at the end of 2016 at $2.35 a share, and has had a pretty tumultuous time on the market since – largely due to no fault of their own.
A lot of this has been simply because of bad luck. They’ve made largely smart acquisitions that immediately contributed positively to the bottom line, however several flukey one-offs appeared out of nowhere, and caused dips in the share price.
Just as the company was picking up momentum in 2017-18, a fluke international issue caused by – seriously – stink bugs resulted in the implementation of quarantine procedures for international transport vessels containing their car shipments.
With these transport ships being quarantined due to the “Brown Marmorated Stink Bugs”, delivery delays mounted & resulted in a loss of revenue.
Soon after, global authorities implemented a new “Worldwide Light Vehicle Testing Procedure” to crackdown on vehicle CO2 emissions, which led to further increased pricing & supply delays for the company.
I’m not sure what else the company did to piss off God, but as if that wasn’t enough just as they were rebounding in a positive way, Covid-19 came out of the blue and smacked ASG down yet again.
The initial fear around Covid unfortunately also resulted in the sharpest decline in new-car sales in 23 years – of nearly 50%.
It’s ironic looking back at this now, considering how strongly the domestic car market (and the prices of cars in general) rebounded in the following few periods, but at the time people were panicked. The company also had to close down dealerships during peak Covid lockdowns, and stand down 35% of staff temporarily.
This had massive knock-on effects to their parts & servicing business as well, as people were bunkered at home and getting their cars serviced was the last thing on their minds.
To their credit, the board actually voluntarily reduced their salary by 40% during this period; a nice sign of solidarity that would give Gerry Harvey a heart attack.
Since then, the trend for ASG has been steadily upward, as society has opened up more again, and the car market has boomed. Still, there are some headwinds working against them in terms of supply, making for a mixed situation for the company at time of writing.
ASG went public in November 2016, and have returned -1.19% p.a annualised since listing (including dividends).
What looks good:
- As mentioned, this company has a massive appetite for acquisitions, and it forms a core part of their growth strategy. They have a knack for making purchases that begin contributing positively to their bottom line in short order, as most dealerships are pretty much already set up & good to go with minimal alteration costs required.
- Their tumble in profit figures are also misleading in raw form, as they not only had these weird one-off mini-disasters happen to them, but also decided to recognise an impairment charge of $109.2M to smooth things out during Covid uncertainty.
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ASG has a strong ownership profile, with retail just over 10% and basically ‘along for the ride’. The rest is made up of private companies, instos, & management/directors with director James Pagent still owning just over 20% of the business (and even more if you account for his family’s trust).
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Likewise, these Top 20 holders have engaged in a good amount of on-market buying over the company’s history, which shows confidence in the numbers.
- They consistently do well growth-wise in general, achieving a respectable 10% revenue CAGR since listing.
- Also as mentioned, the land value of the acquisitions they’ve made – not only the direct revenue from sales – has also gone up. This is almost a semi-real-estate ASX company by proxy.
- The turnaround post-initial-Covid has been very strong. ASG has seen revenue growth of over 16% due to the strong market conditions for car buying & margins, with 27.5% increase in gross profit as well.
- This was due to a nearly 30% growth in new-car revenue; the company is also hoping this will have an onflow effect for service/parts revenue as well. That’s ideal, because…
- … it’s actually the auxiliary services (parts & servicing) that produce the best margins; lockdowns impacted them, but the numbers in this category immediately bounced back as soon as lockdowns ended.
- ASG every year show continued improvement in gross margins across all revenue streams, while lowering operating expenses as well for a double-whammy compound effect on profitability numbers.
- They’ve currently got a strong cash balance of nearly $97m vs. $38.8m in 2020, meaning they’re primed to make yet more acquisitions should they choose to.
- Fundamentally, people want to see/touch/test-drive cars in person before buying. Such a large purchase means that despite lockdowns, Covid issues etc. people still make the effort to go to the dealer and don’t look for competitive/online solutions nearly as much as other products – this gives them something of a moat.
- Their ‘Used Vehicle’ strategy is also working, providing higher margins than the total business as a whole; the only issue has been a lack of stock. Plus, with the market for new vehicles being delayed, this has had a cascading effect to make used cars more desirable for people as a backup (and at higher prices).
- On a base level vs. the (limited) competitors in the auto retail industry on the ASX, they are ‘undervalued’. Motorcycle Holdings (MTO) in the chart below is a motorbike retailer so not exactly like-for-like; the others however are direct competitors:
- ASG have also done a good job of consolidating some of their dealership sites that they rent instead of own, reducing the costs of leases/renegotiating old leases & saving a couple of $ million expenses annually.
What doesn’t look good:
- There’s no avoiding it – the company has generated negative returns since its IPO, and still currently sits below its initial list price at time of writing. Again, while this was pretty much due to issues of no fault of their own, anyone who doesn’t do a deep dive might look at the chart and give it a “no” at a glance.
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Supply chain issues are the greatest obvious headwind against ASG at the moment. While we don’t yet know how badly they’ll end up affecting the company, we’ve seen enough blowouts in other sectors to remain suspicious of the final impact they’ll have on the company’s upcoming report.
- These issues aren’t just with pure shipping, either. It’s great that demand is high, but not only is it becoming harder and harder to fulfill orders on time, but global semiconductor shortages are contributing to car manufacturers being unable to even produce vehicles in the first place.
- This is a fucking high-debt business. Like, a lot of debt, given the company’s size & revenue. Sure, it’s good that property is the main reason, and their debt has reduced significantly year on year… but still, interest rate rise issues are looming.
- 2020 broke their share price momentum; it still hasn’t fully recovered, and in general this feels like another ignored/under appreciated stock in general that might not perform share-price wise reflective of the company performance.
- The automotive sector in general receives little love or attention on the ASX, despite them being mostly fundamentally sound. For whatever reason, it’s simply not seen as a “sexy” industry to invest in even despite all the bitching & moaning people have been doing about rising car prices.
- ASG’s RoE (Return on Equity) figure is kind of ‘meh’, hovering anywhere between the 3 – 10% mark depending on the year. 10% is fine, and if that’s the standard moving forward then great; lower, and you can find much better performers elsewhere on the market.
- The share register being tightly-held by insiders means it’s illiquid; tougher to get in or out, and just low trading volume in general. A.k.a, if you want regular daily movements to excite you, this will no doubt be ‘boring’.
Summary
In all, it looks like this is a company that doesn’t really do any dumb shit, and has mostly just been simply unlucky and/or ignored by investors.
ASG have done pretty much all the “right” things since listing; there’s just been a number of bumps in the road that have smashed sentiment and prevented it from gaining proper momentum.
Due to the macro-market conditions at the moment however, I can’t see a world in which this company’s next report (due just a couple of weeks after writing this, in fact) doesn’t impress.
There’s precedent for this bullish sentiment, which is something you might not expect: the historic link between luxury car sales, and house prices.
This “wealth effect” (when people are/feel like they are making big $$ because their houses go up in value) has a direct knock-on effect to splashing out and buying luxury cars, and the same when the opposite happens:
The data from this study is a few years old, but the trend is basically that when Aussies see their homes pumping, they switch into baller-mode and buy fancy vehicles.
With how much houses have skyrocketed in Australia in the past couple of years, if this trend holds then ASG will be a direct beneficiary.
In addition, you’re generally in a better place as a business when it’s lack of stock that’s an issue, and there’s no shortage of demand for your product. Both are “bad”, but I know which I’d rather.
ASG have also made an effort at diversifying both geographically (especially growing their presence in VIC, which is now booming more since lockdowns eased) & via new brands in their portfolio.
Conclusion: The fact that this is still not even back at its IPO price despite all the growth they’ve had screams ‘undervalued’ to me, and if it weren’t for the fact we’re just about to head into uncertainty regarding interest rate rises & lingering supply issues, I’d probably buy in.
As it is, it’s probably something to simply wait and watch for upcoming results, but I wouldn’t be surprised to see its share price jump up a bunch on its next report.
They’re focused on making acquisitions that are easy bolt-ons and add to their bottom line straight away (they recently bought another Land Rover dealership just prior to writing this), and generally don’t spend cash on stuff that ends up being a stupid money sink.
They look better-priced than their sector peers, they pay a decent dividend (when they’re not getting derailed by Stink Bugs), and they have plenty of cash to splash if they want to.
Debt is our main red flag, but they’re paying it down and not buying stupid stuff with it, either.
Poor ASG just can’t seem to catch a break, as one mishap after another out of their control has rolled into the next pretty much ever since they listed.
Will shipping costs / further supply delays end up being yet another spanner in the Lambo-rim works that keeps their share price from properly taking off again?
We won’t have to wait long to find out.
Company website: https://autosportsgroup.com.au/
MarketIndex page: https://www.marketindex.com.au/asx/asg
Feel free to add your own opinions on ASG in the comments below.
Would you buy this stock? Why or why not? Feel free to vote in the poll.
