Motorcycle Division Out of Gas
There has been a lot of traffic centred on Automotive Holdings Group (ASX: AHG). Just earlier in April, AP Eagers (ASX: APE) announced its intention to acquire AHG. Off the back of the potential merger, AHG’s latest news is around its decision to sell off its motorcycle division. The market had little reaction to this news, closing two cents higher to $2.84/share on the 6th of June.
AHG: In need of a second wind
AHG is an automotive firm based in Western Australia. It has a commercial presence in Western Australia, Queensland, New South Wales and Victoria as well as New Zealand, and specialises in the sale of cars and trucks. AHG holds more than 180 different franchises and operates over 100 car dealerships around Australasia. A range of services including new/used vehicle sale, financing, insurance policies, and parts and equipment service are offered.
The financial standing of AHG has been weak. While revenue growth remained steady gaining 6% to $6.4b this year, net profit after tax (NPAT) steeply declined to $32M (attributable to owners of AHG), almost half of 2018. Furthermore, AHG expects to deliver FY2019 operating NPAT of $50 million, revised downwards from an earlier estimate at $52-56 million. AHG has cited in its annual report that tightened regulations, failure to spin off its logistics division to the Chinese firm HNA, and the declining market for new vehicle as reasons for its underperformance.
Potential takeover in progress
Relations between AHG and AP Eagers date back to 2012. AP Eagers acquired a significant stake in AHG intending to gain exposure to Western Australia; ownership today stands at 95,632,358 shares (28.8%). The friendly takeover deal will potentially result in a 100% ownership stake if the deal goes through in September. The offer stands at 1: 3.6 shares, with an expected market cap of $2.3b for the new merged group.
The merger and acquisition is slated to bring various diversification benefits relating to brand and geography. AP Eagers has suffered revenue declines in its NSW sector in comparison to other states; a merger could help the two companies leverage each other’s geographical presence and help smooth out revenue. A successful merger will see the combined firm has a 12% market share of the new vehicles market, not inclusive of the continued presence in New Zealand from AHG, and will increase the total car dealership count to 242. The majority of 33 leading car brands will be represented under the new combined dealership. Cost synergies potentially amount to $13 million stemming from a reduction in IT, registry and auditing fees. Soft revenue synergies are estimated to bring in a NPAT of $203 million. Finally, APE’s proven management expertise and leadership in delivering growth and profit is expected to benefit the combined group.
Beneath the surface however, what the merger really achieves in addition to synergy-related cost savings is a consolidation to tie the two firms together and help them weather the difficult market conditions presented by current macroeconomic environment. The trade wars have made business difficult for everyone and in this case, bigger could be better.
Sale of motorcycle division
On the 6th of June, AHG announced to shareholders that the company had agreed to sell its motorcycle division (Motorcycle Distributors Australia Pty Ltd) to KTM Sportmotorcycles GmhB based in Austria. AHG’s motorcycle division holds the iconic KTM and Husqvarna brands, yet these brands have not been performing as well due to unfavourable foreign exchange movements, as well as a 13.8% decline in road bike market. The trading result for its motorcycle division in the prior 10 months was a loss before tax of around $1.4 million.
KTM GmhB holds 26% of the business, and is currently responsible for the import and distribution of the two brands. The deal will result in KTM GmhB gaining the remaining 74% from AHG and assuming 100% ownership of the division. Current talks suggest that the transaction values the division at $18 million. The final amount to be paid will be subject to working capital figures and other asset valuations. Settlement is expected in July.
Does it make sense?
It is somewhat puzzling at first sight as to why AHG chose the sell its motorcycle division, especially with the takeover date fast approaching. While AHG has assured shareholders that the takeover bid remains unaffected, there is still the possibility of AP Eagers making revisions to the bid offer. Looking at the situation holistically, the reason that the motorcycle division was underperforming was primarily due to foreign exchange movement, and it is unlikely that a merger could turn this around. From this perspective, it makes perfect sense for AHG to sell its division, and explains why the share price did not move as much.
By Oliver Ju
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