RE:RE:RE:Been 5 months since US dealership purchase..thanks P my bad. here is the CIBC 8/13/18 any thoughts?
AutoCanada Inc. Hoping For A Hairpin
All figures in Canadian dollars, unless otherwise stated. 18-155355 © 2018 CIBC World Markets Corp., the U.S. broker-dealer, and CIBC World Markets Inc., the Canadian broker-dealer (collectively, CIBC World Markets Corp./Inc.) do and seek to do business with companies covered in its research reports. As a result, investors should be aware that CIBC World Markets Corp./Inc. may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
For required regulatory disclosures please refer to "Important Disclosures" beginning on page 6. Please see "Price Target Calculations" and "Key Risks to Price Target" information on page(s) 4.
August 13, 2018 Consumer Discretionary Stock Rating: NEUTRAL Key Ratios and Statistics 12-18 mo. Price Target $12.00 ACQ-TSX (8/10/18) $10.75 Key Indices: None 3-5-Yr. EPS Gr. Rate (E) NM 52-week Range $10.65-$26.11 Shares Outstanding 27.4M Float 25.0M Shrs Avg. Daily Trading Vol. NM Market Capitalization $294.6M Dividend/Div Yield $0.40 / 3.7% Fiscal Year Ends December Book Value $17.33 per Shr 2015 ROE (E) 6.3% Net Debt $373.7M Net Asset Value Common Equity $474.9M EBITDA ($mln) 2016 2017 2018 2019 Current $88.7A $95.5A $70.1E $91.4E Prior $102.8E $115.8E Estimates (Dec. 31) 2016 2017 2018 2019 EPS-Curr $1.44A $1.55A $0.83E $1.28E EPS-Prior $1.73E $1.97E Valuation (Dec. 31) EV/EBITDA-Curr 7.8X 7.2X 9.8X 7.5X EV/EBITDA-Prior 6.7X 6.0X P/E-Curr 7.5X 6.9X 13.0X 8.4X P/E-Prior 6.2X 5.5X
Company Description AutoCanada is Canada’s largest publicly traded automobile dealership group, with operations in Canada and the U.S. www.autocan.ca/
Our Conclusion
While a management team with an impressive pedigree and attractive targets frame upside, deteriorating earnings and a tough macro environment keeps us cautious. Lower earnings forecasts, higher debt, and fewer acquisitions cut our PT from $22 to $12. The share price decline leaves a modest return to target, and our rating remains Neutral.
Implications
Extremely weak results shed doubt on AutoCanada's operational outlook. We believe recent acquisitions and divestitures net out to negative earnings contribution Y/Y, and organic growth will be challenging as the auto cycle corrects.
The company announced the closing of its strategic review, initial financial aspirations, and management and board changes. AutoCanada is targeting $30 million of EBITDA improvement and operating profit comparable to the best of the U.S. public auto dealers, but the specific plan has yet to be disclosed. The few details we heard - prioritizing growth over cost cutting, and adding a subprime portfolio - do not strike us as perfectly suited to the macro environment. Still, we view the new management team and board members as highly capable and worthy of patience.
Unfavourable recent deal-making has driven net debt up to $133MM (or 55%) since Q4/17, without a bump in earnings. Total funded debt to EBITDA ratio of 3.7x is close to the 4x covenant. Working capital swings offset soft earnings in H2/18 but the balance sheet is stretched.
Using the U.S. peer group's 8x EV/EBITDA multiple on our F2018 and F2019 estimates gets us to our new price target of $12 (was $22). We no longer ad acquisitions or look at P/E in our valuation due to higher debt levels. While it is difficult to assess the likelihood of management turning around the business at this early juncture, Friday's 27% sell-off prices in at least some of the challenges.