On Thursday, UBS analyst adjusted the price target for Eagers Automotive Ltd (APE:AU) to AUD11.20 from AUD14.10, while the firm's stance on the stock remains Neutral. The revision follows Eagers Automotive's Annual General Meeting (AGM) trading update, which revealed stronger than anticipated revenue growth of 18%, aided by recent mergers and acquisitions (M&A) and recovery from previous supply issues.
However, the company's profits are declining faster than UBS initially expected, with first-half 2024 (1H24) guidance suggesting a profit before tax (PBT) approximately AUD30 million lower year-over-year, marking a 15% decrease.
Eagers Automotive is facing several headwinds that have prompted the reassessment of its financial outlook. A significant factor is an estimated AUD12 million negative impact from the BYD (SZ:002594) brand due to excess inventory. Other challenges include market softness in New Zealand, a forecasted drop in gross margin, and a minimal profit contribution from recent M&As.
As a result, the projected headline PBT margin is around 3.2%. Excluding BYD and underperforming acquisitions, the like-for-like (LFL) margin is closer to 3.7%, a decline from 4.4% in the fiscal year 2023 (FY23) and below management's previously stated expectation of at least 4% margins for the current year.
While the valuation of Eagers Automotive appears more attractive at a UBS estimated 10x through-the-cycle price-to-earnings (P/E) ratio, based on an assumed 3.5% PBT margin, UBS notes several risks that could impact the company's performance.
These risks include the potential for Toyota (NYSE:TM)'s profits and margins to decrease from currently elevated levels due to an existing order bank, the possibility of demand moderation further impacting earnings, and the indication that more than half of the earnings shortfall could be attributed to BYD and New Zealand operations.
In light of these near-term uncertainties and the recent trading update, UBS has decided to maintain a Neutral rating on Eagers Automotive shares. This stance reflects the balance between the newly assessed valuation appeal and the risks that could affect the company's future earnings.
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