Description

Summary

AMA is a serial acquirer in the vehicle panel repair business in Australia and New Zealand with about 10% market share in its core business, by far the largest operator in a highly fragmented market. AMA can complete typical acquisitions at multiples of 3-5X EBITDA. For those familiar with the Canadian listed Boyd Group Income Fund (BYD-U), AMA presents an opportunity to invest in a similar business but slightly earlier in its maturity. For those unfamiliar with Boyd, please check the three previous VIC write ups. Over the last five and ten years, Boyd has delivered 37% and 47% annualized returns, respectively. Boyd has achieved this through an acquisitive strategy in Canada and later expanded into the US. There are also several private equity backed competitors in the US who are pursuing the same strategy. AMA management is aware of the North American market and Boyd’s success.

Business Description

Vehicle Panel Repairs

This is the bread and butter of the business and is directly comparable to Boyd. At year end June 30 AMA operated 130 vehicle repair sites and recently acquired another 50 sites in the Capital SMART acquisition. These sites are located across Australia and New Zealand. This segment also includes heavy vehicle repair, a market niche likely with better margins, which AMA recently entered and is a $1.5bn market. Adjusting for the recent deal with Suncorp, the panel repair business will contribute about 85% of total revenues and around 90% of EBITDA. As part of the Capital SMART deal presentation, management estimated the total market size at $4.7bn, not including the heavy vehicle repair niche. AMA’s market share is 10% with the remaining 90% occupied by small and medium size operators across 3,000 sites. Ultimately management believes that it could capture as much as 30%. The number of sites has been shrinking over time as smaller mom and pop shops close due to lack of succession planning and their relative inability to deal with more technologically complicated work at their modest size. Insurers, who are large customers, are also driving for increased consolidation to realise operational efficiency and improve the policyholder experience.

Automotive Components and Accessories (ACAD)

The ACAD business manufactures and distributes automotive products and accessories. The strategy in this division is the same as in panel repair in that it is a fragmented market with good acquisition opportunities. Management believes that this division could grow to be roughly two to three times its current size through M&A with ROE’s of 20%.  Currently it contributes the remainder (approximately 15%) of revenue and EBITDA.

Procurement and Distribution

The Procurement division is a start up business. With several contracts already signed it should have sales in FY 2020 and should be about break even. This business was started as a result of management capitalizing on their procurement capabilities/scale to bring savings to smaller competitors on consumable items. Management estimates the size of the global market at roughly $5bn.

History

There are a number of good background articles at this link: https://amagroupltd.com/news/ . Some of them are promotional but we think this was part of an unknown small cap’s IR efforts. The brief history is that in 2006, Ray Malone sold his panel repair business for shares in AMA and was president of that division. Around the time of the financial crisis, the roll up was in serious trouble with too much debt. In 2009 with his substantial shareholding Malone was able to call an AGM and fire the then Chairman and CEO. Malone became CEO and later Chairman.

In the time Malone was at the helm (2010-2018) he brought down debt from 4x to net positive cash while growing revenue from about $50 million to $500 million primarily through acquisitions. Revenue per share rose 21% per year while EBITDA per share grew at 14% per year. In April 2018 Blackstone offered to purchase the panel repair business of AMA for $0.86 with the ACAD business being spun off to shareholders. That price equated to 10.7X EV/EBITDA. After an unfavourable tax ruling regarding the spin off, the parties decided to not proceed with the transaction. During Malone’s time at AMA the total shareholder return was in excess of 40% per year but this is obviously heavily skewed because of the start date. Moving the start date one year later to early 2010 the share price return is still close to 40% annualized.

In late 2018 Malone decided to transition out of his executive duties and Andy Hopkins took over as group CEO. Andy owns 33.6 million AMA shares. Andy both joined AMA and acquired his AMA shares though the sale of his Gemini Group to AMA in 2015. From 1990 he grew Gemini from one shop in the UK, sold the UK business in 2005 and continued to build the Australian business, with 40 shops, until its sale for $71 million to AMA in 2015.

As part of Malone’s transition out of the business AMA also had the goal to become an ASX200 company. With that goal in mind Malone sold part of his stake in AMA to several large shareholders including the largest current shareholder Australia Super as well as Myer Family Investments and Colinton Capital. As part of this deal Colinton’s founder Simon Moore joined the AMA board. It is interesting because prior to founding Colinton, Mr. Moore was head of Carlyle Australia. Carlyle happens to own a stake in the US equivalent of AMA – Service King (links below).

https://www.carlyle.com/sites/default/files/case-studies/ServiceKing_case_study.pdf

https://amagroupltd.com/wp-content/uploads/2018/11/AMA-Group-crash-test-dummy-for-%E2%80%98friendly%E2%80%99-activism-_-afr.com_.pdf

Capital allocation

M&A

AMA typically pays 4-6x EBITDA, we’ve heard that it’s as low as 2x in certain instances. Higher valuations are usually for larger deals where there is more corporate infrastructure and competition, which is directionally what we’ve also heard from Boyd over the years. The company employs earns outs in most of the typical deals with about one third of the price paid upfront.

In early 2016 AMA entered into a ten year agreement with BASF. BASF would supply its paint to AMA and in return AMA would receive an up front discount on the paint used. We believe the payments will amount to roughly $140 million and from our understanding the payments accelerate as AMA grows faster. Indeed for the Capital SMART acquisition, $50 million of financing was provided by BASF and over the last several years AMA has collected about another $50 million. Boyd Group had/has a similar agreement with PPG. This low cost financing is a nice to have boost to the acquisition strategy.

Roughly adding up the market sizes of retail panel repair ($4.7 billion) and heavy panel repair ($1.5 billion) we think there is a large runway for AMA to continue to scoop up mom and pop operations, and on top of this the company also has good room to continue acquiring in the ACAD business as well.

Use of Debt

AMA management brought down net debt/EBITDA from a peak of over 4.5x in the crisis years down to negative net debt over the last few years. In the last two years capital deployment has taken net debt/EBITDA to about 1.4x and with the Capital SMART deal the ratio will go to 2.5x and management has stated its intention to de-lever that to below 2.0x.

Dividends

Considering the company has raised equity three times over the last 10 years, it does bother us that the company also pays dividends considering that there is a large runway for continued acquisitions at an average of 4x EBITDA. We were told what we’ve been told in other countries such as Canada - that retail investors like and want the dividend. Although not ideal, we can live with it given the opportunity.

Capital SMART Transaction

On October 1^st AMA announced the acquisition of 90% of Capital SMART for $420 million at a price of 11.1X 2020 EBITDA and 9.5X 2021 EBITDA including $17 million of synergies, AMA ended its fiscal year 2019 year on June 30, 2019. Suncorp is one of Australia’s largest insurers and will retain the remaining 10%. As part of the deal AMA also acquired ACM which is Australia’s largest recycler of panels and mechanical parts for the automotive industry. ACM was established in 2013 as a JV with Suncorp and LKQ Corporation. The company financed the deal with $199 million new debt, an equity raise of $216 million, and $54 million from its paint supplier through a working capital advance.

We do not invest in serial acquirers who acquire for strategic, as opposed to financial, reasons. Once in a while we do see that a good acquirer will pay a higher than normal price for strategic benefits. In this case, we think the rationale is clear to see. Given private equity interest in the sector, such as Blackstone’s bid for AMA itself in 2018, there was a clear threat that a private equity buyer would step in and buy Capital SMART as it was the last remaining player of size in the market and use it as an acquisition platform. Knowing this, AMA decided to pay a PE type multiple and prevented a credible competitor to enter its market. Clearly paying 11X EBITDA won’t result in eye popping ROIC’s directly but it allows AMA to continue to pick off the best mom and pop competitors at its average 4X EBITDA for years. As part of the deal AMA has entered into a 25.5 year agreement with Suncorp for SMART to be the preferred choice for Suncorp’s auto panel repair clientele.

Valuation

AMA trades at 11.2x and 8.9x 2020 and 2021 EV/EBITDA multiples, respectively. Boyd trades at comparable EV/EBITDA multiples of 12.6x and 11.2x. On a P/E basis AMA trades at 23.0x and 18.3x 2020 and 2021 fiscal years, versus Boyd at 30x and 26x. For a company that should be able to deploy capital at ROE’s north of 20% and growth at roughly the same rate we find those multiples not demanding. We believe that EPS growth should continue over the next 3-5 years at a 15% CAGR, during this we collect a 2% dividend yield and we don’t believe we should see a multiple contraction. In fact we would argue that with increased recognition AMA could attract a higher multiple than today. This adds up to total shareholder return of at least high teens if not greater than 20% over the next 3-5 years. We would also add that if the market were to apply a Boyd like multiple to AMA the shares would be between 15-35% higher depending on which year you use. Additionally, Blackstone’s attempted bid for AMA at 10.7x gives us an indication of where a takeout price would value AMA.

Risks

Overpaying for acquisitions. The recently completed Capital SMART acquisition was done at 11.1X EV/EBITDA. If the company were to transact as such high prices the model does not work.

Liquidity. AMA only trades $1.5million USD per day on average although recent placement and rights issue and size should help increase liquidity going forward.

Catalyst

Continuation of rollup of smaller competitors at attractive prices leading to revenue/share and FCF/share growth.

If the Blackstone interest is any indication, it is possible that a private equity buyer may be interested in this given the success of the rollup model in the sector in North America.