Description

AMA Group

AMA has been written up twice on VIC - by Rosco37 in late 2019 and Mimval in early 2022.

Rosco’s initial thesis on AMA was the opportunity to invest in the Australian version of Boyd. Boyd itself has been written up a number of times on VIC, with the company having been one of the TSE’s top performers over the past couple of decades.  

Boyd was a serial acquirer / roll-up story looking to consolidate the fragmented vehicle repair industry in North America. Boyd was able to purchase mom & pop smash repair shops cheaply (lack of succession planning, private-public multiple arbitrage), whilst generating both revenue and cost synergies on the acquired shops. (On the revenue side, preference from insurance companies to deal with a larger player and ability to invest in PPE to take on more complex repair work. On the cost side, cheaper sourcing of spare parts and paint through collective bargaining power.)

At the time of rosco’s write up, AMA had just consummated the acquisition of Capital SMART from insurance company Suncorp. Whilst the multiple paid was quite high, the investment logic was that it would remove the threat of another major entrant into the Australian smash repair market, consolidate AMA’s dominant market position and allow them to continue to execute the Boyd playbook.

However, soon after the write up, COVID hit, creating a number of issues for AMA.

·         Most obviously, the relationship between kilometers driven and collisions. Major Australian capital cities Sydney and Melbourne were subject to rolling lockdowns, severely restricting mobility, with Melbourne in particular subject to some of the harshest lockdown laws on the planet.  

·         The skills shortage was exacerbated by COVID, given that immigration (which was placed on hold during the period) plays an important role in AMA’s labor force, resulting in both labor inflation and lower utilization rates.

·         Discontent between Andy Hopkins (CEO at the time) and BoD member Simon Moore. Both were simultaneously blaming the other for bad behavior – Simon blaming Andy for inappropriate expense claims, and Andy to Simon over advisory fees that Simon’s corporate advisory firm received on advising AMA on the Capital SMART transaction. This culminated in Andy ultimately being ousted from the company in early 2021, whilst there was an exodus of senior managers aligned to Hopkins that would have been disruptive to the organization.  

·         The company lurched under the debt load following the Capital SMART acquisition. In order to appease the banking syndicate, AMA had to undertake an A$150mn equity capital raise in late 2021.

Soon after the equity raising, Mimval posted their AMA thesis on VIC in January 2022, with the share price down 65% from rosco’s write up. Ultimately the thesis was a mean reversion / re-opening trade, with the belief that as COVID abated, margins would broadly revert to 2019 levels, as parts/labor inflation proved transient and AMA’s dominant market position would ultimately allow it to reclaim its fair share of the value chain’s economics from the insurers.

However a combination of continued effects of COVID and poor management execution saw profitability issues emerge, soon after the capital raising. Immigration issues remained, with the skills shortage and absenteeism caused by future strains of COVID continuing to impact the ability of AMA’s network to approach full utilization. Meanwhile global supply chains were disrupted, resulting in significant inflation of parts, with AMA not able to sufficiently pass on enough of these cost increases (the largest culprit here being their Suncorp contract, associated with the Capital SMART acquisition).

When AMA Group released its FY23 results, it simultaneously announced ANOTHER A$55mn capital raise in order to appease their bankers following a covenant breach and subsequent renegotiation, whilst also announcing the departures of CEO Carl Bizon and Chairman Anthony Day. The capital raise was to be done at 7.5 c per share, a steep discount to the pre-announcement share price of 12c. Following the announcement, sentiment understandably reached yet another nadir, whilst AMA’s largest shareholder, Australian Super, quickly exited their position in the aftermath, resulting in the share price at one point going as low as 3.4c.

Sentiment on the company remains poor, with shares still trading below the capital raise price. However in light of the current valuation and business momentum, the set-up on AMA Group is compelling.

·         AMA Group’s recent 1H24 results has seen some stabilization of the business, and a massive improvement from pcp (+$16mn), largely driven by a reset in the Capital SMART pricing contract post July 2023, which had previously burdened the group. Management is now guiding pre-AASB 16 2024 EBITDA of A$42-49 mn (this represents a slight improvement on guidance of A$39-49mn, given at release of FY23 results – one of the rare times in recent years for AMA where forward guidance has improved).

·         Following the capital raise, the improved financial profile, combined with the stabilized financial results should also put them in good stead to term out their current debt maturities, with uncertainty around this refinancing currently a drag on the company.

·         There have been several recent insider purchases by various BoD members

·         Based on management’s FY24 guidance range, AMA is currently trading at EV/EBITDA of between 5.3-6.2x. This doesn’t need to be Boyd 2.0 to generate a decent return from here. If the business continues to stabilize and management continues to make efforts to incrementally capture better economics from the insurers, then it wouldn’t take heroic assumptions on margin improvement and multiple expansion for shares to double in the next few years. If the company can resolve its balance sheet and performance to the extent that it can resume its previous strategy of leading the consolidation of the Australian vehicle repair industry, then there remains the possibility that AMA shares could multi-bag from current levels.

Catalyst

Continued margin/revenue improvement

Debt refinance