Dilutive times at AMA
I am very rarely interested in Australian companies and currently own none. I operate with something of a reverse home-bias, which I see as a potentially, very useful hedge to most of my wealth being tied up in an Australian home and generally find the Aussie markets uninspiring.
However, my interest has been piqued watching the slow burn of management trouble and now covenant stress at panel-beating roll-up AMA Group. The pressure reached a climax last week with the company entering a trading halt to shore up its capital position and satisfy its lenders.
By Friday, the AFR was reporting (https://www.afr.com/street-talk/terms-out-for-150m-ama-group-raise-20210910-p58qh4) a raise, containing $100m AUD equity and a $50m convertible bond, being floated to institutions.
In my opinion, the restructuring is an unnecessary technicality that totally ignores the normalised profitability of the business, likely to resume soon. It also dilutes long-suffering shareholders by around a quarter, but if there is a positive to be had, the company now sports bullet-proof liquidity and a drastically lower share price than before the rumours started.
A year to forget
AMA Group is the largest collision repair company in Australia, having grown sales from $50m to over $900m over the last decade, and is still early in its strategy of rolling up a decentralised industry. The company is headquartered on the Gold Coast and currently run by CEO Carl Bizon.
Having seen its market capitalisation plunge over 75% in Q1 2020, to a point where it touched $170m despite revenues of close to $900m, AMA had been recovering in the aftermath of peak pandemic fear. Unfortunately the stock faltered badly in January following the resignation of CEO Andrew Hopkins, due to allegations of fraud and self-enrichment at the company’s expense.
The ongoing reporting of legal action proved hard to shake and talk of nervous creditors drove something of a capitulation in the share price year to date. An equity raise was being priced in by the market and then some. AMA had obtained a waiver from meeting its covenant requirements until December 2021, but had promised lenders it would restructure its borrowings before the end of the year.
The reality is that AMA was already deleveraging significantly, having divested two non-core subsidiaries (ACAD and Fully Equipped) and paying down $54m net debt over FY21 from $227m to $179m.
As a smash-repair business, AMA’s performance obviously correlates with total road kilometres driven. The stop/start Covid lockdown environment and significant shelving and postponement of long distance travel took a heavy toll. Prior to Covid-19, an environment where driving essentially stopped would have been inconceivable, it is natural that the company experienced some pressure under these nightmare conditions.
Given this, the company still achieved $920m in revenue for FY21 with their recent acquisitions of Capital S.M.A.R.T. and ACM parts contributing significantly. I believe it is likely AMA will hit revenues of around $1b comfortably, in a post-Covid environment. With the current roll-out of vaccines, the worst should be soon behind the group.
AMA post-recap
I always enjoy looking at businesses going through capital raises (as an outsider!). There are often jaded shareholders who have just suffered the double ignominy of a cratering share price, then ownership dilution. There being allegations of management wrongdoing only makes the situation more unpalatable to institutions forced to tell their clients they own it.
I see AMA as too cheap for its post-Covid fundamentals, but being priced as if the lockdown hangover will be permanent. If the company hits $1b in revenues in its first pandemic unaffected year (now likely to be FY23) and achieves historic EBITDA margins of around 9-10%, we can expect normalised EBITDA of $90-100m in short order.
Compare this to the post-recap enterprise value of the group of $528, with net debt reduced to $29b, $50m of the convertible bonds and new market cap of $449m ($332 existing and $117 new equity raised at 37.5c, at today’s price). 5.5x will likely look like a steal, post-pandemic. This is the sort of multiple normally applied to stodgy, no-growth value traps, but AMA is and has historically been, growing fast.
The business model seems likely to sustain this trajectory. AMA only commands low-teens market share of the Australian auto-repair industry and is growing its advantage with increased scale. The more technology featured in modern cars, the more niche the equipment required to repair it. Consequently, a small outfit with a single or few-store footprint will struggle to outfit their shop to meet the same range of vehicles.
The company has also had success buying smaller competitors at much cheaper multiples than they worth when folded accretively into the group. There appears a very long runway for this inorganic growth, funded by strong free cash flow.
Autonomous driving and safety tech
I believe credit stress is now well and truly off the table for AMA. On top of the new liquidity, as part of the raising, the due date of existing debt was pushed back two years, to October 2024.
The other major concern for the terminal value of AMA is the long-dated threat of autonomous driving causing a radical drop in the number of road accidents. While this may play out over time, the industry has thus far reported higher repair bills for cars with extensive safety technology mitigating the lower crash figures. In the event of the industry beginning to shrink, the large players will be in a strong position, for the reasons mentioned above. The chart below is provided by The Boyd Group, a Canadian smash-repairer, in their latest investor presentation.
Outlook
Increasing scale and streamlined operations are reasons to believe that EBITDA margins could move towards the mid-teens, as the company is targeting. This scenario would place AMA on less than 4x- ridiculous for a company with its growth profile.
Rough comparisons have been made to the aforementioned Boyd Group which was even rumoured as a potential buyer of AMA in 2018. Boyd controls around 7% of the US$40b North American market and is the largest player, by number of locations. The company is well run, but despite achieving an identical EBITDA margin to AMA’s average, is valued at a hefty 17x 2019 EBITDA (pre-pandemic peak).
In my opinion, hindsight will prove this capital raising and the accompanying pessimism to have been a strong entry point for AMA Group. I estimate fair value at 12x normalised EBITDA which, even allowing for no margin expansion, values the equity at $1-1.2b AUD- an upside of 120-165%.
Thanks for reading, I’m having some issues with my Wordpress site, so apologies if this is formatted awkwardly.
Guy
As always, this isn’t investment advice. Please do your own due diligence and seek professional advice if you’re unsure about your finances.