Strong profits, new dividends: Is ASX-listed Motorcycle Holdings sliding under the investor radar?
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CEO Dave Ahmet highlights why the company is positioned for another big year in FY22.
National motorbike dealership network Motorcycle Holdings (ASX:MTO) is coming off a record year of growth in FY21, with core earnings set to almost double.
And as it launches into FY22, CEO Dave Ahmet is at the helm of a business that makes strong profits and is returning to paying dividends – and which may be sliding under the investor radar.
With plenty of momentum on its side, Stockhead spoke with Ahmet this week to get his views on the outlook for both MTO and the broader industry.
With a strong footprint across Australia’s major east coast markets, MTO was well-placed to ride the tailwinds in consumer behaviour created by the pandemic, as domestic savings rates climbed while travel was restricted.
Vehicle sales across the board – whether for cars or motorcycles — shot higher through the second half of last year.
And as one of Australia’s largest motorcycle distributors, MTO capitalised with a sharp uptick in top-line sales.
In early May, it flagged full-year core earnings (EBITDA) guidance of $42-$45 million, up from $27m in the year prior.
But while MTO’s share price has rebounded from its post-COVID lows, it still looks undervalued based on the strength of its financial metrics.
“I think one area there’s a disconnect with the market is that yes, there were some tailwinds, but we’re also outperforming the industry on top of that,” Ahmet said.
“There were a lot of initiatives we implemented over the past 12-18 months that improved the bottom line, so it wasn’t just the pandemic effect.”
Those initiatives included an eye for expansion, which saw MTO acquire two new dealerships in October 2019. As a result, FY21 was the first full-year period in which those new acquisitions contributed additional earnings.
The company also executed a national distribution agreement with the Indian Motorcycle group, a premium US brand that now sells across its east coast network.
And before the pandemic hit, the MTO executive team was focused on a cost-cutting initiative to drive margins across its network, which provided a further earnings uplift as sales rose.
The company used a lot of that extra cash flow to pay down debt. “And so we go into FY22 with a healthy balance sheet and strong earnings, ready to expand,” Ahmet said.
In that context, Ahmet sees a major value-add opportunity in M&A, as Motorcycle Holdings looks to build out its dominant footprint across the sector.
“The industry is very fragmented,” he said. “We’re the only large dealership group in Australia pursuing a roll-up strategy, so we see a really long tail there in terms of growth opportunities.”
Ahmet is currently in discussion with “multiple” parties looking to sell their business.
“A lot of companies in the space have had a good year, so there’s vendor interest and we’re cashed up and in a great position to take advantage of that,” he said.
“So there’s an opportunity for us to buy well-established businesses with strong turnover and really expand our market footprint.”
Along with its motorcycle sales, Ahmet highlighted that MTO has successfully established a vehicle financing arm which was more than three years in the making.
In FY21, its financing division contributed net profits of around $1m to group earnings.
“It’s really starting to deliver and next year will be even better again,” he said.
The success of MTO’s vehicle finance division comes amid healthy growth in the broader sector, as other ASX consumer finance stocks gain traction with vehicle financing options.
In that context, MTO has a competitive advantage where its vehicle finance solution is already integrated into its market-leading network of motorcycle dealerships.
“So that’s a new profit line that I don’t think the market has fully understood or known we had there,” Ahmet said.
In terms of the sector outlook, Ahmet concluded that it’s important to note while motorcycle sales picked up sharply in the post-COVID economy, reports of a demise as the world emerges from the pandemic have been greatly exaggerated.
“There was plenty of growth last calendar year, but if you look at the first six months of 2021, the sector as a whole is reporting monthly sales growth of 5-6%,” he said.
“So the industry has really settled. It’s not like some months last year where you saw these big spikes. It’s found a consistent sort of volume and it’s been like that all year.”
In addition, MTO is comfortably outpacing the industry standard, with monthly sales growth of more than 20%.
“So the key message we’re trying to get across is we don’t think things are just going to fall away,” Ahmet said.
“And we’re coming into the new financial year with elevated profit margins and plenty of tailwinds for growth.”
This article was developed in collaboration with Motorcycle Holdings, a Stockhead advertiser at the time of publishing.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.