Company Overview: Peter Warren Automotive Holdings Limited (ASX: PWR) is engaged in the business of sale of new and used motor vehicles. It also deals with related spare parts, inventory and trade-related services. The Group has a rich history of 60 years of business in Australia and operates 74 franchises and is present in 18 Dealership locations. It also represents 28 Original Equipment Manufacturer’s across the Volume, Prestige and Luxury segments.

PWR Details

Decent Business Performance in FY21 on the Back of Uptick in Vehicle Sales: The company’s range of service offerings captures the value chain across the automotive life cycle, which provides the platform for scale and diversification to its earnings base.

Significant Market Opportunity:

• The Group has the potential to increase its market share given the consistent uptrend in the number of registered vehicles in Australia.
• The market for new vehicle sales is mostly skewed towards the eastern part of the country, with over 50% of the market size attributable to Queensland and New South Wales. These are the regions where PWR has a significant presence and will look for further consolidation.

FY21 Performance Update:

The company delivered impressive performance during the year with most of the key metrics trading ahead of the prospectus forecast.

• Proforma revenues increased by ~18% to $1,621.2 million in FY21, compared to FY20 and over 6% increase to the prospectus forecast. New vehicle sales formed a major part of the revenue at $1,095 million in FY21, reflecting a growth of ~23% on the prior corresponding year.
• It reported an increase of ~42% in proforma EBITDA to ~$108 million in FY21, over the prospectus forecast.
• The Group has posted a significant increase in proforma PBT by ~376% to $75.7 million in FY21, when compared to FY20 figures.
• PWR has sold ~30k vehicles during the year, reflecting an increase of ~9% on FY20.
• It ended the period with a cash position of ~$43 million as of 30 June 2021 and no corporate debt on the balance sheet. The borrowings of the company stood at $328.6 million during the period end, comprising of floor plan financing and lease liabilities.

Trend in Revenue (Source: Analysis by Kalkine Group)

Strategic Priorities Moving Ahead:

• The company is focused on its property portfolio and in its ownership or long-term leases in key strategic regions.
• It plans to expand its current operations in the sale of new and used vehicles and also provide complementary services.
• It also plans to continue to expand through targeted acquisitions based on strategic rationale, location and value.

Top 10 Shareholders: The top 10 shareholders together form around 69.39% of the total shareholding, while the top 4 constitute the maximum holding. Warren (Paul) and Quadrant Private Equity Pty Limited   are holding a maximum stake in the company at 35.08% and 9.42%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

 Key Metrics:  The Group reported decent performance in FY21 and posted an improvement in most of the key metrics during the period. EBITDA margin increased to 7.3% in FY21, compared to 4.7% in FY20. There also has been an improvement in the asset turnover ratio to 2.06x in FY21, compared to 1.81x in FY20. ROE also reflected at 13.7% in FY21, from a level of 7.1% in FY20.

Profitability Metrics & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• COVID-19 Impact: The Group’s operations are exposed to the impacts of the pandemic, and any subsequent lockdowns in key markets could affect its earnings.
• Semi-Conductor Chip Shortage: Its line of business and the sector is dependent on semi-conductor chips for seamless manufacturing of car units. The prevailing shortage of chips is a risk for the company, which can have an adverse impact on its sales.
• Financial Risk: The company’s activities make it prone to several financial risk which includes foreign currency risk, interest rate risk, credit risk, and liquidity risk, etc.

Outlook: The company has delivered a resilient performance in vehicles sales in FY21 and has outperformed the market during the same period. It has multiple growth drivers in place for FY22 and is positioned to achieve further scale benefits going forward. It has recently held its AGM on 26 October 2021 and has updated that it has witnessed stronger than expected performance from its QLD business. As per the management demand in both NSW & QLD remains strong at the end of the September 2021 period and has improved from June 2021 position. On the back of an improvement in trading conditions, PWR now anticipates H1FY22 PBT to be in the range of $32 million to $34 million.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company has updated that its NSW showrooms have re-opened as of mid-October following COVID-19 protocols. The stock of PWR gave a positive return of ~2.27% in the past one month and a negative return of ~8.95% in the past six months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ median EV/Sales, considering the decrease in liquidity position, uncertain trading conditions due to the spread of COVID-19, and semi-conductor chip shortages. For the purpose of valuation, few peers like Eagers Automotive Ltd (ASX: APE), Bapcor Ltd (ASX: BAP), MotorCycle Holdings Ltd (ASX: MTO) have been considered. Considering the expected upside in valuation & current trading levels, decent performance in FY21, results exceeding prospectus estimates, resilient business model, optimistic guidance and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.95, (as on 26 October 2021, 10:43 AM (GMT+10), Sydney, Eastern Australia).

PWR Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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