This week we look at three holdings that are benefiting from the Covid-world as Australians continue to avoid using public transport and use their vehicles more often for both work and leisure travel.
The fear of Covid continues to turn Australians away from public transport and toward using their vehicles for both commuting to and from work, buying groceries and taking the kids to school. In some cases, public transport use is only back at 60% of pre-Covid levels.
In many cases, families are also looking to purchase a second vehicle for the household. This is driving demand for used cars especially. We have seen the Moody’s Analytics price index showing used vehicle prices surging 7% in August and are 25% higher from last year.
At the same time, the new vehicle market is seeing supply constraints (due to port delays around the world) and increased demand, resulting in a lack of inventory to sell by auto dealers. As lockdowns ease in Victoria over the next few weeks and other states such as South Australia, Queensland and Western Australia open their borders to our most populous state, New South Wales, we expect domestic tourism to accelerate alongside holiday travel by car.
All the above is creating a perfect storm, in terms of demand and margins, for the following companies:
National Tyre & Wheel (NTD.ASX) is a tyre and wheel distributor in Australia & New Zealand. The group business includes supply across all segments except for large mining equipment and bicycles. Segments include car, SUV, 4WD, light commercial, truck & bus, industrial, agricultural & off the road.
They delivered revenues of $160m and EBITDA of $12m in FY20. This was strong given that revenue was impacted following the bushfires as well as Covid related lockdowns across all regions the company operates in, management has indicated normalisation. That said, pricing pressure remains something to watch with the company introducing new initiatives such as private label and near sourcing as well as cost reduction
In more recent news, the company finalised the acquisition of its largest competitor, Tyres4U, last month. This adds $280m of revenue and a significant opportunity to bring similar margins (i.e. those NTD was making prior to the acquisition) to the combined business.
We estimate that the combined group can deliver $450m of sales and $30m of EBITDA in FY22, which translates to approximately $17m in NPAT. This compares quite favourably to the current valuation of $85m. Importantly, the company retains $23.5m AUD and, though dividend was cut as a result of Covid-related measures. We expect it to come back in Q1 2021.
Money3 (MNY.ASX) provides used vehicle finance and has recently expanded into the new vehicle finance market. The company is well managed and is operating in a $20bn market opportunity across Australia and New Zealand. MNY has fared well during the Covid crisis and has emerged in a strong financial position to take advantage of the increase in demand for car finance mentioned above while also being in position to opportunistically acquire any struggling or underfunded competitors.
In terms of specific numbers, revenue was up 35.3% to $124m, 16.4% growth in the loan book and 31% growth in EBITDA. More importantly and from a risk perspective, cash collections have increased y-o-y at double digits as well as the introduction of tighter credit controls.
We think the company will provide a strong trading update at their upcoming November AGM. We value MNY at $3.00.
Eclipx (ECX.ASX), a fleet management company, is a classic turnaround story. For investors, it hasn’t been too kind with debt blowing out of proportion and product line being too hard to handle. Novated leasing and fleet management remains a messy industry. However, management has successfully reduced debt, divested non-core businesses with the current core now being three brands FleetPlus, FleetChoice and FleetPartners. Debt has been reduced by 38% and cost savings of close to $12.5m AUD.
New business writings continue to strengthen more recently to pre-Covid levels (circa. 80%). In our view, the key catalyst will come from the end of lease car sales which will benefit from the increased demand, along with firmer pricing, for used cars. Additionally, we see ECX as a potential takeover target as the sector looks to consolidate. We estimate that there is $20-$30m of cost synergies available for an industry player looking to acquire them. Our valuation is about $2.00.
Disclaimer: All three stocks are currently held in TAMIM portfolios.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.