The end of the great car boom: AP Eagers issues surprise earnings downgrade

Company News

by Glenn Dyer

The great car boom has ended with the country’s biggest dealer, AP Eagers (ASX:APE), issuing a surprise earnings downgrade, which saw the shares slump almost 20%.

The update from the company came after three huge years, as a shortage of vehicles led to surging prices for both new and used vehicles, resulting in very strong earnings for it and its rivals (which held up well through 2020 and 2021).

Eagers Automotive told the ASX on Wednesday that June-half profits (it has a calendar-based financial year) would be 15% down on last year.

The shares fell 19% to a low of $9.87 before recovering strongly to around $10.61 just after midday, to be off a still nasty 13%.

In the update, Eagers warned that it was facing a number of macroeconomic headwinds - not unlike the rest of the country:

"Cost of living pressures impacting retail consumer spending; Inflationary conditions increasing the cost of doing business; Current expectation we are at top cycle interest rate conditions; An increasingly competitive marketplace."

Despite reporting revenue growth of 18.3% year to date to April, compared to the same period in 2023, the company forecast a 15% decline in profit for the first half of 2024.

Or, as CEO Keith Thornton explained - oddly - "Given the current market and business dynamics, and with a cautious lens on consumer sentiment, we expect to achieve an underlying trading performance for the first half of 2024 that is approximately 85% of the underlying profit before tax for the first half of 2023."

That was just over $207 million, so a 15% drop would put that figure around $170 million and means Eagers has been forced to give up a lot of margin to keep car sales ticking over.

And the CEO left the strong impression that this was a temporary happening:

"The new car market remains on track for another record year as our order bank continues to be delivered, supporting both revenue and margins,” he said in the statement.

"The Federal government's extension to its Instant Asset Write Off in the 2024 budget and the rollout of Australia's New Vehicle Emission Standard on 1 January 2025 were both flagged as potentially boosting sales and profits in the second half of 2024.

"We remain on track to exceed our revenue growth ambition in 2024 and will continue to be relentless in the execution of our business transformation strategy, while using discipline to review increasing opportunities for accretive M&A activities.”

Seeing Eagers reported revenues up 15.3% to $9.9 billion in 2023 and revenues this year so far are up more than 18%, the company will have a yearly figure of well over $10 billion but car sales will be made at smaller margins unless there’s a pick-up in demand or another shortage of vehicles, which doesn’t look likely at the moment.

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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