Author Topic: AMA:AU - Ama Group  (Read 1200 times)

kab60

  • Hero Member
  • *****
  • Posts: 1456
AMA:AU - Ama Group
« on: July 31, 2020, 02:36:32 AM »
Wanted to get this one out here pretty quickly since the shares have fallen back and I think the risk/reward is quiet good. There's a much more thorough writeup on VIC from before covid19 (when the stock was almost 200 pct. higher).

Summary:

AMA Group is an Australian vehicle panel repair roll-up - yeah, one for the compounder bros! - with around 100 pct. upside to private-market value. It went through one of the craziest selloffs Iíve seen after weak Q1 results following a large acquisition, bad headline numbers and a dividend cut which I suppose spooked retail investors.

Add Covid19, a misunderstanding of AMAís covenants, and it seems you had a perfect storm with AMA trading down to 0,15/share or around 100m AUD marketcap just six months after raising around 250m AUD in equity at 1,15/share (and trading at 1,5/share before that). Not long after AMA Group put out a release where it said things were basically fine and covenant tests were postphoned which made it pop from 0,15 to 0,7 in rapid fashion before falling back to 0,5ish.

AMA Group is led by a founder with skin in the game, operates in a very resilient and fragmented industry where it takes advantage of private-to-public arbitrage buying subscale, mom-and-pop shops and plugging them into its network - the largest in Australia and the only real platform limiting competition for deals.

Company description:

AMA Group first and foremost repairs vehicles at its Australian and New Zealand shops under different group names like Gemini, Capital SMART (transformative acquisition in fall 2019)

Thesis point 1:

Blackstone agreed to buy AMA Group in 2018 for around 10xebitda but deal fell through after an adverse tax ruling).

To understand the potential of the model, check out Boyd Services in Canada which is a 20 bagger in ten years and trades at 13-15xebitda.

Thesis point 2:

After closing the Capital Smart acqusition for some 400m in 2019, Q1 results spooked investors with profitability slipping. The issue is that modern cars are full of electronics, and AMAís pricing model with insurers - its customers are mainly 5-6 insurers in Australia - didnít capture the cost inflation fast enough. Since then all insurer contracts have been renegotiated which puts normalized earnings power (per management) at some plus 100m ebitda (brokers had estimates of some 115m before covid19). That compares to a marketcap of 400m today and net debt of some 200m.

Thesis point 3: Traffic in China is up after covid19, and generally a 10 pct. increase in traffic leads to a 25 pct. increase in accidents as per AMA Group CEO. Itís not significant to the thesis, but Australians quitting public transport, going on vacation in their cars in their home country etc might actually provide a tailwind. Per a recent interview, AMA Groupsí volumes in June were already at 90-95 pct. of last year. Since then some states have closed their borders again, but I suppose that too shall pass.

Thesis point 4: While assisted driving systems etc might limit accidents in the future, theyíll be more expensive to repair. Thus provide Australia with a long runway of growth. At the same time Australia, unlike a lot of countries, have a net growing population due to migration (at least before covid19). The repair market in Australia is 7b today, AMA Group is at 1b in revenue, so thereís a long growth runway ahead. Most mom and pop shops have a hard time to keep up with the increased cost of calibration equipment etc to service newer vehicles, mainly a looking to retire, so there should be lots of bolt-on deals at low valuations for a long time to come.

Bonus: Forager Funds, an Australian Fund (which has done quiet well internationally, less so at home) is long. There's a long interview with the CEO, published a few days ago, which basically tells the whole investment case here: https://www.eurekareport.com.au/investment-news/ama-group-expecting-rise-in-vehicle-crashes-post-covid/148298?v=1033619 (free to signup for an account - I might also be able to DM).

Anyone following and have some pushback?

Disclosure: I'm long


kab60

  • Hero Member
  • *****
  • Posts: 1456
Re: AMA:AU - Ama Group
« Reply #1 on: August 25, 2020, 05:10:04 PM »
Results out, weaker than expected and I don't like the commentary from management. They seem too focused on growth, too unfocused on profitability. Sold my whole position at the open. Will have to reasses. Anyone else following?

Spekulatius

  • Hero Member
  • *****
  • Posts: 5908
Re: AMA:AU - Ama Group
« Reply #2 on: August 25, 2020, 07:02:44 PM »
Results out, weaker than expected and I don't like the commentary from management. They seem too focused on growth, too unfocused on profitability. Sold my whole position at the open. Will have to reasses. Anyone else following?

Agreed, going through the annual report, it seems that they seem to be focused on growth rather than operational excellence.

I also noticed a strange error in their annual report head page. Thatís a pretty big yellow flag.
Quote
With our focus on acquisitions, the Group acquired the New Zealand based Fully Equipped business in January 2021.
Life is too short for cheap beer and wine.

SI2020

  • Newbie
  • *
  • Posts: 12
Re: AMA:AU - Ama Group
« Reply #3 on: August 26, 2020, 08:39:55 AM »
Can you explain how results were below expectations? Boyds revenue and margins were also down, isn't that expected in a lockdown with less driving? Thanks.

kab60

  • Hero Member
  • *****
  • Posts: 1456
Re: AMA:AU - Ama Group
« Reply #4 on: August 26, 2020, 12:38:21 PM »
Can you explain how results were below expectations? Boyds revenue and margins were also down, isn't that expected in a lockdown with less driving? Thanks.
It was a very quick decision since I expected a large selloff and mostly based on a combination of lack of urgency in restoring margins, taking a large impairment and calling it prudent (instead of saying we overpaid) while talking loads about growing and not owning up to subpar execution and comitting firmly to 10 pct margins. Still going through the AR, and read the transcript, and perhaps I sold too quick. AR has some interesting numbers around CGU's which makes it possible to somewhat establish a guidance range. Seems they increased the discount rate quiet a bit. Still pondering what to do now.