Automotive Solutions IPO Offers Exposure to ‘4WD’ Demand
Management forecasts to achieve pro forma revenue of $42.7 million, which would translate to 7% growth year on year.
Automotive Solutions Group Limited is an Australian company focused on vehicle accessories. The company seeks to raise nearly $30 million via IPO to list on the ASX on 21st December. The listing is a consolidation of eight individual business which are all engaged in the manufacturing, supply and fitting of parts and accessories for four-wheel-drive (‘4WD’) and sport utility vehicles (‘SUV’). The businesses of the initial portfolio are located in QLD, NSW, VIC and WA.
Management forecasts to achieve pro forma revenue of $42.7 million, which would translate to 7% growth year on year. The valuation of $50.4 million, which is roughly 11 times the forecasted pro forma earnings for fiscal year 2017, appears undemanding if the company can achieve ongoing growth. M&A activity provides upside while consolidation of the individual businesses could result in synergies and operational efficiencies. Looking at the sector, successful precedents in the industry provide favourable tailwind for the float, as competitors have delivered shareholder value and market sentiment is positive. A few examples include Motorcycle Holdings (ASX:MTO), ARB Corporation (ASX:ARB) or Bapcor Limited (ASX:BAP).
However, the acquisitions are subject to integration risks and there is no guarantee that performance can be replicated or improved as a consolidated entity. The company lacks a consistent track record as a combined entity and integration may take longer or be more costly than forecasted. A lack of free cashflow inhibits the company to pay a dividend for FY17, which could be a disadvantage as most of its peers distribute cash to shareholders.
Automotive Solutions offers transitional exposure to demand for vehicle accessories. The Company’s revenue profile, valuation and potential upside from M&A activity are attractive qualities, while the success of precedents in the industry should generate public interest and support the float during early trade. Hurdles include cash flow, integration risks and the limited operating history as a combined entity. The company is competing with peers who distribute income to its shareholders and we believe that the introduction of a dividend within the next 12 months would demonstrate sustainability and increase shareholder value. However the undemanding valuation mitigates some of the risks associated with this listing.
Author: Simon Herrmann
Dec 19, 2016
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.