AutoCanada Inc

AutoCanada Inc (TSX: ACQ) operates in car dealerships across Canada. The group offers new and used vehicles, spare parts, maintenance services, and is associated with customer financing. AutoCanada retails premium brands such as Chrysler, Dodge, Jeep, etc. The majority of revenue is derived from the new-vehicles sales segment.

Q2FY20 Financial Highlights: AutoCanada announced its quarterly resulted, wherein the company reported a 23.1% dip in its top-line to CAD 727.447 million. The decline was driven by a soft demand scenario across the markets on account of the negative impact of the pandemic, including government restrictions in the state of Illinois. Total vehicles sold stood at 15,094, down 22% over Q2FY19. Gross profit stood at CAD 97.879 million, reflecting a plunge of 36.2% on y-o-y basis due to lower revenue. The group reported an operating loss of CAD 4.388 million, as compared to an operating profit of CAD 18.906 million in pcp. However, same-store finance and insurance gross profit per unit grew by 18.0% over Q2FY19. The company reported adjusted EBITDA at CAD 4.828 million, depicting a fall of 85% on y-o-y basis. The Adjusted EBITDA includes CAD 43.2 million in inventory write-downs, provisions, and typically non-recurring charges. Net loss widened to CAD 20.052 million from CAD 3.512 million in the previous corresponding period (pcp).

Q2FY20 Financial highlights (Source: Company Reports)

Risks:  Due to the lower consumer spending, the automobile market witnessed an unprecedented hit in the recent past, and most of the Auto selling companies reported a setback in their performance. Continuation of the tepid demand scenario could hurt the sales volume further, which might dampen the top-line of the company.

Valuation Methodology (Illustrative): EV/EBITDA based valuation

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock ACQ made a dream run and appreciated ~104% and ~114% in the last six months and one year, respectively. The Company initiated a re-engineered business model, which resulted in a ~CAD 10 million costs savings. The Company witnessed a demand improvement during the month of May 2020 and June 2020, which is encouraging. With the decline in consumer spending, the group witnessed a surge in demand for the used car segment, and we believe, the trend is likely to continue for a while. The group reported a lower debt at CAD 124.2 million as compared to CAD 170.2 million in Q1FY20, which is impressive looking at the current economic cycle as most of the businesses have increased the debt component. Furthermore, same-store finance and insurance gross profit per unit grew by 18% on y-o-y basis, which is encouraging. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a lower single-digit downside (in percentage terms). For the said purposes, we have considered industry (Specialty Retailers) median on NTM basis. Hence, considering the current valuation, recent stock-price movement, we believe, amidst the improving demand across the auto-industry, the stock has gone ahead of its fundamentals, and we prefer to wait for the better entry point. Hence, we recommend a ‘Watch’ stance on the stock at the closing price of CAD 17.75 on September 09, 2020.

ACQ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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