- Automotive Holdings posted solid interim result - Forecasts and price targets lifted - Acquisitions and expansions offer further upside potential

By Chris Shaw

For motor vehicle dealer Automotive Holdings Group ((AHE)), a 3% increase in interim profit to $29.6 million proved enough to beat market expectations. As UBS notes, it came in the face of weak consumer markets, while RBS Australia points out it was up on a previous corresponding period that had been fuelled by government stimulus measures.

In underlying terms, Automotive Holdings lifted EBITDA (earnings before interest, tax, depreciation and amortisation) by 14%, though this was partially offset by higher interest costs and higher funding rates related to land acquisitions.

Accompanying the interim result was solid outlook commentary from management, UBS noting order books for Automotive Holdings remain firm in both the Western Australian and New South Wales markets. The Queensland market appears likely to bottom in the final quarter of 2011.

While specific earnings guidance for the full year was not provided, RBS Australia notes management expects the second half of 2011 will be boosted by a flood and cycle related vehicle replacement cycle in Queensland.

As well, RBS is positive on the capacity expansions being achieved at the Brisbane Rand and Melbourne facilities, as Automotive Holdings has been able to expand margins at the same time as it has lifted capacity.

Logistics is another potential source of upside for Automotive Holdings, BA Merrill Lynch noting cold storage achieved 17% sales growth from the previous corresponding period while also lifting margins. With the Queensland depot to come fully on-stream in coming months, the broker suggests this growth could accelerate.

This could be significant, as BA-ML points out the logistics operations tend to be a higher earnings multiple business than the auto operations. This means stronger growth in logistics should be value accretive for Automotive Holdings.

Acquisitions have been a key driver for Automotive Holdings in recent years and UBS expects this trend to continue. The advantage is such deals generate scale benefits for the group, which the broker expects will continue to drive earnings accretion.

There may be a slowing in the pace of acquisition growth though, as RBS Australia estimates the balance sheet at present offers little or no room for any acquisition without a capital raising.

Post the interim result of Automotive Holdings there have been some increases in earnings forecasts, BA-ML increasing its net profit estimates by 5-6% for FY11/FY12 and RBS Australia upping its numbers by 1-3% across the same period.

In earnings per share (EPS) terms consensus estimates for Automotive Holdings according to the FNArena database now stand at 25.2c in FY11 and 27.6c in FY12. The increases to broker forecasts mean increases in price targets, the database now showing a consensus price target of $2.99, up from $2.87 prior to the interim result.

The FNArena database shows Automotive Holdings is rated as Buy by the four brokers covering the stock, with targets ranging from $2.80 from Macquarie back in August last year to UBS at $3.10.

Shares in Automotive Holdings today are slightly higher in a down market and as at 1.50pm the stock was up 2c at $2.72. Over the past year the company has traded in a range of $2.10 to $2.88 and at current levels these is upside of around 10% to the consensus price target in the FNArena database.

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