Eureka Report -AMA beats out its growth pathway by Brendon Lau

AMA beats out its growth pathway

Brendon Lau

4 August 2014

Investing in small caps is more a bet on management than anything else, and buying shares in AMA Group (AMA) makes for an interesting proposition.

This is because the automotive parts and services group’s head, Ray Malone, breaks the mould of what could be described as the typical chief executive.

Not that there are any real stereotypical leaders in small cap land, although many are suit wearing, business trained and polished communicators.

I’ve never seen Malone in a suit, and I wonder if he owns one. This isn’t to say he isn’t business savvy, although he received his education from “the school of hard knocks”. I profiled Malone in November last year[1], as I was fascinated with the man who had overcome his disadvantaged background.

eurekareportshareprice [2]

Malone is autistic, was orphaned at 11 and had to fend for himself at 16 by taking on a spray painting apprenticeship. He worked 80 hours a week for the next 10 years to scrape together enough savings to open a panel beating shop with two of his friends. He eventually bought them out.

That business was subsequently sold to AMA Group, and Malone became the group’s saviour years later by taking over the reins from the previous managers when it was facing bankruptcy.

The repaired AMA Group now finds itself in a sweet spot due to changes in the industry, with insurers forming their own network of authorised repairers to control costs. AMA Group is an approved repairer for most of the major insurers, such as RACV, while the majority of its smaller rivals are not.

This leaves AMA Group well positioned to benefit from the inevitable consolidation of the fragmented industry, and it is the latest takeover of Melbourne-based Repair Management Australia that is driving an expected 35% increase in revenue to $91.3 million in 2014-15.

There is a lot of capacity for the group to grow via acquisitions as Malone has a considerable war chest to fund takeovers, and he isn’t afraid to use it. AMA Group has an under-geared balance sheet, with a forecast current year net debt to equity ratio under 4% and cash generative businesses. It’s not just the panel beating business that has room to grow.

In fact, panel beating is not even AMA Group’s biggest division by revenue – at least not yet. The division is expected to report sales of $15.4 million from the last financial year compared with $27 million from its vehicle protection business, which essentially manufactures and distributes bull bars.

Sales growth in vehicle protection got a big boost from last year’s acquisition of rival Custom Alloy, which is forecast to add around $12 million in annual revenue and $1.5 million to earnings before interest and tax.

Divisional revenue forecasts for AMA's divisions (A$'000)

FY

Vehicle protection

Panel repair

Accessories distribution

Cable & accessories

Transmission Repair

Other

Total

Growth

2014

27,000

15,400

9,408

8,900

4,600

2,450

67,758

 

2015

35,200

31,500

9,126

9,167

4,140

2,205

91,338

 

2016

38,016

35,280

9,400

9,442

4,223

2,271

98,631

 

2017

39,917

39,514

9,682

9,725

4,307

2,339

105,484

 

2018

41,913

41,489

9,972

10,017

4,393

2,409

110,194

 

But not every division is firing on all cylinders. Its Western Australia-exposed accessory distribution business and its brakes business are being weighed down by the mining slump. The silver lining is that these divisions constitute a relatively small proportion of group revenue.

Malone won’t say what’s next on his shopping list, but it’s clear that he’s got options and that’s why I believe my earnings growth forecasts for the group is a little too conservative – although this is always a good starting point when looking at small caps.

Earnings forecasts

Based on my price target of 36 cents and fully franked forecast dividend of 1.68 cents a share for 20-14-15, there is another 28% upside to the stock if you included franking credits. AMA Group pays dividends once a year around November.

I am forecasting earnings before interest, tax, depreciation and amortisation (EBITDA) to surge 80% to $15.9 million in the next three years before Malone retires. The group’s chief operating officer, Ray Smith-Roberts, is being groomed to succeed Malone.

But the group’s full-year result announcement later this month won’t show much of this growth due to weakness in WA and the costs impost from the buyout of Custom Alloy. Acquisitions take time to bed down and it is normal to see a quicker rise in costs compared with a ramp-up in revenue over the shorter term.

This is why I am anticipating a close to 150 basis point (1.5 of a percentage point) squeeze in EBITDA margin to around 13% for 2013-14.

Further, higher tax payments due to timing issues will also likely crimp on its bottom line. On my conservative estimates, net profit will come in at $5.5 million compared with last year’s $7.4 million.

However, and more importantly, I expect to hear upbeat commentary from management regarding the current year’s outlook, and any near-term dip in the share price should be regarded as a buying opportunity.

There are execution risks to my upbeat longer-term forecasts, but Malone’s straight talking and down-to-earth mannerism (along with his track record) gives me confidence that he will deliver to expectations. After all, Malone tells me he lives life on two key principles. The first is commitment and focus.

“The other is to work like a Trojan,” says Malone. “I don’t muck around.”

Click here[3]to see AMA Group’s forecasts and financial summary.

 

AMA Forecasts and Financial Summary

Key Financials

FY15

P/E Ratio

x

 

Return on Equity

%

 

EBITDA Margin

%

 

Net Debt /Equity

%

 

Dividend Yield

%

 

Dividend Franking

%

 

Dividend Payout Ratio

%

 

AMA

FY2012

FY2013

FY2014

FY2015

FY2016

FY2017

Year end: June 30

Actual

Actual

Forecast

Forecast

Forecast

Forecast

All figures in '000 unless otherwise stated

Profit & Loss Statement

Op Revenue

59,522

63,403

67,758

91,338

98,631

105,484

Growth (%)

     

Interest received

85

322

102

105

240

250

Other revenue

3,318

1,184

Total Revenue

62,925

64,909

67,860

91,443

98,871

105,734

Raw materials

-29,070

-31,186

-33,201

-44,299

-47,836

-51,160

Employee benefits

-16,170

-17,615

-19,024

-24,731

-26,339

-28,051

Advertising & marketing

-632

-789

-789

-828

-870

-913

Insurance

-290

-342

-359

-600

-630

-662

Travel & motor vehicle

-723

-802

-802

-826

-851

-876

Occupancy expenses

-2,657

-2,701

-2,971

-5,670

-5,897

-6,133

Professional services

-739

-761

-761

-784

-807

-832

R&D

-148

-152

-157

-161

-166

-171

Communication expenses

-175

-162

-167

-172

-177

-182

Bad & doubtful debt

-25

-32

-32

-32

-32

-32

Other expenses

-826

-762

-762

-700

-800

-800

EBITDA

11,470

9,605

8,835

12,639

14,466

15,922

Op EBITDA

11,385

9,283

8,733

12,534

14,226

15,672

EBITDA margin (%)

      

D&A

-406

-397

-468

-1,498

-2,644

-2,795

EBIT

11,064

9,208

8,366

11,141

11,822

13,127

margin (%)

Finance costs

-794

-431

-231

-416

-154

-4

Adjusted Profit before Income Tax

10,270

8,777

8,136

10,724

11,669

13,123

Fair value adjustment and vendor payments

-288

471

Profit before tax

9,982

9,248

8,136

10,724

11,669

13,123

Tax benefit/expense

-2,067

-1,833

-2,685

-3,217

-3,501

-3,937

Tax expense % PBT

      

Normalised NPAT

7,915

7,415

5,451

7,507

8,168

9,186

Net profit/loss from discontinued ops

-250

-225

Reported NPAT

7,665

7,190

5,451

7,507

8,168

9,186

EPS (adj, cont) cents

      

EPS Growth

-30.95%

   

Payout ratio (%)

   

Dividend per share (cents)

     

Franking credit (cents)

    

End of year SOI

281,749

304,459

334,251

334,251

334,251

334,251

Cash Flow Statement

Cash flows from operating activities

Receipts from customers

65,187

73,665

67,758

91,338

98,631

105,484

Payments to suppliers and employees

-56,548

-62,561

-59,025

-78,804

-84,405

-89,812

Interest received

85

322

102

105

240

250

Finance costs

-796

-431

-231

-416

-154

-4

Net tax

-2,685

-3,217

-3,501

-3,937

Net Change in Working Capital

-606

-1,734

590

0

Net cash inflow from operating activities

7,928

10,995

5,313

7,271

11,401

11,981

Cash flows from investing activities

Proceeds from sale of PPE

6

14

0

0

0

0

Acquistion of property, plant and equipment

-249

-100

-4,900

-7,000

-2,330

-1,000

Net payment for equity investments

-785

-785

Payments for intangible assets

0

-18

Net cash (outflow) from investing activities

-1,028

-889

-4,900

-7,000

-2,330

-1,000

Cash flows from financing activities

Proceeds from issues of shares

0

15,085

0

0

0

0

Costs relating to share issue

0

-567

Proceeds from borrowings

0

0

0

2,000

Repayment of borrowings

-4,051

-4,705

-7,331

0

-3,500

-2,000

Dividends paid

-2,822

-4,571

-5,348

-5,630

-6,126

-6,890

Net cash inflow (outflow) from financing activities

-6,873

5,242

-12,679

-3,630

-9,626

-8,890

Net increase (decrease) in cash and cash equivalents

27

15,348

-12,266

-3,359

-554

2,092

Cash and cash equivalents at the beginning of the financial year

3,750

3,777

19,125

6,859

3,500

2,946

Cash and cash equivalents at end of year

3,777

19,125

6,859

3,500

2,946

5,037

Balance Sheet

ASSETS

Current assets

Cash and cash equivalents

3,777

19,125

6,859

3,500

2,946

5,037

Trade and other receivables

11,005

9,035

10,390

11,949

12,100

12,100

Inventories

4,869

5,741

5,741

6,741

6,000

6,000

Other

446

543

543

543

543

543

Total current assets

20,097

34,444

23,534

22,733

21,589

23,680

WC

-1,355

-2,559

590

0

Non-current assets

Property, plant and equipment

1,926

1,561

5,993

11,495

11,181

9,386

Deferred tax assets

4,287

3,700

1,646

1,646

1,646

1,646

Intangibles

27,256

27,271

27,271

27,271

27,271

27,271

Trade and other receivables

38

0

0

0

0

0

Other

0

441

441

441

441

441

Total non-current assets

33,507

32,973

35,351

40,853

40,539

38,744

TOTAL ASSETS

53,604

67,417

58,884

63,585

62,127

62,424

LIABILITIES

Current liabilities

Trade and other payables

8,490

7,495

8,245

9,069

9,069

9,069

Borrowings

3,511

5,448

3,553

3,553

2,053

53

Provisions

1,544

1,812

1,812

1,812

1,812

1,812

Income tax liabilities

0

981

981

981

981

981

Total current liabilities

13,545

15,736

14,591

15,415

13,915

11,915

WC

750

824

0

0

Non-current liabilities

Borrowings

12,022

5,436

0

2,000

0

0

Deferred tax liabilities

2,157

2,438

384

384

384

384

Provisions

207

257

257

257

257

257

Other

1,091

194

194

194

194

194

Total non-current liabilities

15,477

8,325

835

2,835

835

835

TOTAL LIABILITIES

29,022

24,061

15,426

18,250

14,750

12,750

Net working capital

-606

-1,734

590

0

NET ASSETS

24,582

43,356

43,459

45,336

47,378

49,674

EQUITY

Issued capital

57,816

73,971

73,971

73,971

73,971

73,971

Reserves

47

0

0

0

0

0

Retained profits/losses

-33,281

-30,615

-30,512

-28,635

-26,593

-24,297

TOTAL EQUITY

24,582

43,356

43,459

45,336

47,378

49,674