Description

From AMA Group’s current price of A$0.47, we see upside potential of 66% to our A$0.78 estimate of Fair Value.   A$0.77 = 10x EBITDAaL (pre-AASB 16) (est. for CY2023) of A$100M (10% margin on A$1B sales) = A$1B minus net debt of A$100M (excluding converts) minus A$20M minority interest = A$880M equity / 1,142M shares (fully diluted for converts) = A$0.77 per share   Equity value = 17.6x FCF est. of A$50M.

AMA Group is the largest vehicle panel repair (VPR) business in Australia and New Zealand. With FY 2021 sales of A$920M, it represents 13% to 15% market share of the industry’s total revenues at their estimate of A$6B to A$7B annually.  We estimate that AMAis 15 times the size (in sales) of its next closest competitor.  For perspective, compared to AMA's roughly 14% market share, the top 3 operators in North America (Caliber, Boyd/Gerber/ Service King) don’t add up to that much in terms of aggregate percentage market share. AMA is a roll-up, consolidating a fragmented industry, and appears to be following the template of Boyd Group Services (BYD CN, C$186), a Canadian firm which has been very successful rolling up that industry in Canada and the U.S., generating a 35% CAGR total return for its shareholders over the past 10 years.

Type “Australia” into the Apple.com mobility website and you’ll see driving is +20% over pre-COVID baseline, which would imply a much faster return to pre-COVID sales for AMA than we think is currently reflected in consensus estimates. https://covid19.apple.com/mobility    

AMA’s new management team expects to increase margins by buying auto parts direct (instead of via distributors) and consolidating AMA’s buying power (AMA buys $350M in auto parts annually on normalized sales of $1B), which wasn’t done after prior management rolled-up current business group, as parts buying still done locally for 178 sites across Australia and New Zealand.   This is an inefficiency that the new CEO wants to fix.  They lay out the case in their presentation for the Sept. 2021 capital raise:  https://amagroupltd.com/wp-content/uploads/2021/10/20210910_AMA_ASX_Investor-Presentation_FINAL.pdf 

AMA was last written up on VIC in October 2019.  The stock price has been cut by ⅔ since then.  We established our position in February 2021 at approximately A$0.66, so our experience has not been pleasant to date. But we’ve significantly increased our position on weakness over the course of 2021 and in Q3 in particular, including via subscription to the company’s attractively priced (A$0.375/US$0.2725) entitlement offer in September, getting our average cost down to about A$0.55, so we're sitting on an unrealized loss of 15% with the stock at A$0.47 right now.  We were initially surprised by the size of the capital raise (A$150 million) since the company’s net debt to EBITDA was just 2.7x, which is very reasonable by U.S. standards and well below AMA’s global peers.  For example, Blackstone's privately held Service King (Midas) carries around 10x net debt to EBITDA and Hellman & Friedman's privately owned Caliber Collision is at 9x, so while those entities clearly might need some deleveraging, we thought AMA at 2.7x was fine, but banks in Australia are much less tolerant of debt than in the U.S.  

Organic growth is slow, as miles driven dictates number of collisions, but should rebound strongly from COVID-19 and as more people drive to work vs. mass transit and more people drive to vacation rather than fly.  Collision avoidance technology is a long-term headwind, but has had only a minor effect so far, offset by more tech in each auto yielding more expensive bills per repair.  90% of revenues are paid by auto insurance companies, maintenance cap-ex is low, and free cash flow conversion is high.  Large players like AMA can better afford new equipment needed to service higher tech content in panels, better terms from suppliers (like AMA’s 10-year deal with BASF for paint) and payers (insurers expected to agree to pay AMA more for more complex repairs).

Below is a timeline of relevant events:

4/13/18: Blackstone, owner of a comparable company, Service King, in the U.S., which it bought in 2014 from Carlyle (from Service King Case Study) and considered selling in 2017 (Bloomberg: Blackstone, Carlyle might sell Service King for $2B) agreed to pay A$508M (10.7x EBITDA of A$47.7M) to buy-out AMA Group’s panel repair business, leaving an auto components business to be spun-out.  The total value appears to be around A$1.20 per share (on much lower share count then).  See presentation explaining the deal then:  AMA Group Reorganization Overview

6/22/18: Blackstone buyout of AMA called off when ATO (Australia’s IRS) refuses to grant expected capital gains tax relief.

11/8/18: Founder Ray Malone sells most of his stock at A$0.95 per share to a group led by Colinton Capital, AusSuper, and Myer Family.

9/30/19: AMA announces their largest acquisition yet, the A$447M buy-out of Capital SMART from Australia’s 2nd largest car insurer, Suncorp.  The valuation was 11.5x EBITDA pre-synergies, and 8x post-synergies of A$17M targeted.  That compares to their many smaller deals done at around 3.5x EBITDA with the biggest previous deal (A$100M buy of Gemini Accident Repair Centers in Dec. 2015) at 7.5x EBITDA pre-synergies.  The higher than normal price was rumored to have been necessary to ward off a potential major new entrant (private equity), but coming before COVID-19 collapsed demand, the timing was clearly poor.

10/11/19: AMA financed 48% of the Capital SMART buyout with equity, selling 67M new shares at A$1.15 for A$77M, and 121.5M shares via rights offer also at A$1.15 per share for A$139.7M, for total equity raised of A$217M.  BASF advanced A$54M vs. paint buys.

2020: COVID-19, volume of repairs collapses.

1/31/21: AMA Group ousts CEO Andrew Hopkins (Exec. Director since 2015 when his former firm was acquired), claiming he charged excessive unapproved expenses, seeks A$1M.  Names director Carl Bizon as CEO.  AMA stock falls on news.

2/2/21: Mittleman Brothers begins buying shares of AMA Group Ltd. (AMA AU) at US$0.50 (A$0.66).

2/5/21: Ex-CEO Hopkins sells his entire 5.5% stake (40.8M shares) at A$0.65 in block trade (not bought by us).

3/18/21: Mittleman Brothers files 6.2% stake in AMA Group Ltd. (45.7M shares), making us 4th largest shareholder.

9/2021:  A$150M capital raise, A$100M stock issued A$0.375, and A$50M convertible bond (converts at $0.47)  https://amagroupltd.com/investor-centre/ 

Risks:  There is more customer concentration risk in Australia vs. North America, more bargaining power for the insurers.  An example of that risk perhaps manifesting now is that one of AMA's largest customers, IAG, is funding a new entrant called Repair Hub since 2019, likely in order to diversify away from reliance on AMA, and that is now a meaningful player at 16 sites, vs. 178 locations for AMA, so not a huge threat at the moment but something to keep an eye on.  Still, it's likely those new sites are stealing more market share from mom and pops than from AMA.

Re: risk of ADAS, from interim peak in Australia motor vehicle insurance claims frequency in Mar. 2010, it’s down about 20% over the ensuing 11.25 years shown below, a -2% CAGR, possibly attributable to ADAS.  But average claim size has increased 45% over that same time frame, a +3.4% CAGR, likely due to increased complexity (electrical content) in vehicles, of which ADAS is only one part.

Source of underlying data: Insurance statistics Australia. Original data has been indexed to the March quarter 2004 and trended using a 7 term Henderson moving average.

Some market share info for U.S. & Canada: https://www.repairerdrivennews.com/2021/04/08/romans-guest-column-looking-back-ahead-on-auto-body-repair-industry-consolidation/ 

We really like the risk/reward ratio that AMA’s shares present at current price, evidenced by the large position size it now occupies in our portfolio.  Not only because it represents one of the few remaining re-opening trades that has yet to be fully exploited, but also because of an ongoing opportunity to further consolidate their highly fragmented industry, which we think can be done on highly accretive terms.  New technologies are making car crashes less frequent, a headwind for the collision repair industry that is largely offset by an increase in cost per repair due to the more complex nature of the work.  Whereas a low-severity accident might have required only a pounding out of a dent before, now it will often require a recalibration of the sensors and cameras that are increasingly found in cars on the road today.  Many small operators are not willing to invest in the extra equipment necessary to handle these new demands, and demographically speaking they are generally run by older people with adult children not interested in taking over the business, so there should be a good supply of smaller independent shops for sale at highly accretive multiples.  

We are long AMA Group and may buy or sell additional shares at any time. This is not a recommendation to buy or sell securities. Please conduct your own research and reach your own conclusion.

Catalyst

- A much faster return to pre-COVID sales for AMA than we think is currently reflected in consensus estimates

- Continued opportunity to further consolidate their highly fragmented industry, which we think can be done on highly accretive terms