AutoCanada Inc. (TSX: ACQ) is a leading North American multi-location automobile dealership group, currently operating 66 franchised dealerships, comprised of 27 brands, in eight provinces in Canada as well as a group in Illinois, USA. The company offers new and used vehicles, spare parts, maintenance services, and customer financing. Most of the revenue is generated in the new-vehicles sales segment.

Key highlights 

• Robust financial performance in Q2 2021: The company achieved a record-breaking success in Q2 2021, with sales of CAD 1,281.1 million, up from CAD 727.4 million in pcp. The company proceeded to develop strongly in all sectors of the business, both in Canada and in the United States.
• Higher same store retail units: Sales of new and used retail units in the same shop grew by 40.5% to 18,362 units, with new retail units up 19.1% and used retail units up 61.7%. On a TTM basis, the business sold an average of 58 used automobiles each month per dealership in Canada, up from 42 the previous year.
• Strong and Consistent Free Cash Flow Generation: The company generated healthy free cash flows of CAD 67.8 million in Q2 2021, compared to CAD 53.4 million in Q2 2020, thanks to improved operational performance and an increased focus on managing working capital.

Source: Company

• Deleveraging balance sheet: The Company had a net indebtedness leverage ratio of 0.1x at the end of the quarter, which was below the target leverage ratio of 2.5x to 3.0x. The key drivers leading to the improvement over the preceding quarter were strong operational performance in Q2 2021 and sustained effective working capital management.

Source: Company 

Financial overview of Q2 2021

Source: Company 

• The company’s revenue increased by 76.1% to CAD 1,281.1 million, as compared to CAD 727.4 million in the prior year. This is the highest second quarter revenue reported in the Company's history.
• Total gross profit increased by 123% to CAD 217.8 million compared to CAD 97.8 million, propelled by the Company's continued focus on the used vehicle market and strong F&I outperformance.
• Although the company reported higher operating expenses, still due to higher sales it managed to report operating profit of CAD 66.1 million compared to loss of CAD 4.3 million in pcp.
• Net income in the reported period stood at CAD 42.2 million against a loss of CAD 21.5 million in pcp.
  

Risks associated with investment

There may be disruptions to the global automotive manufacturing supply chain, resulting in limited access to inventory. In addition, there may be impacts on general economic conditions resulting in reduced demand for vehicle sales and service. 

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The company delivered another record-setting performance in Q2 2021. It clocked healthy free cash flows and deleveraged its balance sheet and brought the debt under minimal risk. Moreover, in line with continued population growth, vehicle sales would increase which would help the company in growing its business. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 47.37 on October 01, 2021. We have considered Arko Corp., Vroom Inc, OneWater Marine Inc. as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on October 01, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

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