02-Feb-2021:  Moelis Australia: MOTORCYCLE HOLDINGS LTD (MTO): BUY: Gunning it

• Analysts:  Sarah Mann, +61 2 8288 5407 - sarah.mann@moelisaustralia.com - and
• Tom Tweedie, +61 2 8288 5423 - tom.tweedie@moelisaustralia.com

EVENT

Strong trading conditions lead to 1H21 upgrade. Despite the impact of the Melbourne restrictions, trading conditions have remained solid for motorcycle dealers. Demand across the country has been robust, picking up in November and December. Supply of new and used bikes and accessories has remained constrained – leading to abnormally strong GP margins. As a result, MTO now expect 1H21 underlying EBITDA to be between $26-27m ~10% ahead of guidance provided at the AGM in November for underlying EBITDA of $23-25m. Excluding the $5.8m of JobKeeper payments in the period, MTO delivered ~100% growth on the pcp. While the current elevated GP margins will return to normal once supply returns we note: (1) road bikes remain ~27% below peak levels; (2) MTO has pulled out permanent costs; (3) weaker USD should benefit MTO’s accessory wholesaling business; and (4) net cash position provides an option for M&A.

IMPACT

• No sign of supply easing, with the current supply demand mismatch leading to elevated gross margins. While MTO note that ‘as stock supply increases margins are expected to move towards more normal levels,’ there is still no sign of supply normalising. As a result, we expect margins to remain elevated for the rest of FY21, returning to normal levels in FY22.
• Bike sales grew +11.5% in 4Q CY20 across the industry, with the majority of the growth driven by ATV sales which were up +22.5%. Across CY20, MTO’s core road bike category was up +9.2% (compared to overall sales +22.1%), noting that road bike sales are still ~27% below peak sales in CY16.
• New Indian franchises performing well, with MTO selling on average 40-50 new bikes per month at similar margins to Harley Davidson (MTO’s most profitable brand). Since securing the franchise agreement in Feb 20, MTO has progressively been rolling out Indian bikes across its existing MCA stores. Given sales of Indian bikes require no incremental cost, the GP generated on each bike drops through to the bottom line.
• Strong balance sheet position allows for M&A, however we expect management to remain disciplined and given current conditions we do not expect an acquisition in FY21.

INVESTMENT VIEW

FY21 EPS upgrades reflect strong GP margins continuing into 2H21, however our FY22-23 earnings and $2.97 TP remain largely unchanged, BUY.

• Sector:  Retailing / Automotive Retail
• Ticker: MTO
• Stock Price: $2.59
• Target Price: $2.97
• Forecast Capital Return: 14.6%
• Forecast Dividend Yield: 6.0%
• Estimated Total Return - 12 Mth Forward: 20.6%
• Market Cap: $159.8m
• Free Float (%): 63.3
• Enterprise Value: $195.6m
• 52 Week Range: $0.60 - $2.75
• Shares Outstanding: 61.7m
• Avg. Daily Value Traded: $0.1m
• Index: N/A

[I do not hold MTO shares.]

30-Nov-2020:  Moelis Australia: MOTORCYCLE HOLDINGS LTD (MTO): BUY: What a ride!

Analysts:  Sarah Mann, +61 2 8288 5407, sarah.mann@moelisaustralia.com

and Tom Tweedie, +61 2 8288 5423, tom.tweedie@moelisaustralia.com

• Recommendation: Buy
• Stock Price: $2.59
• Target Price: $2.98
• Forecast Capital Return: 14.9%
• Forecast Dividend Yield: 5.3%
• Estimated Total Return - 12 Mth Forward: 20.2%
• Market Cap: $159.8m
• Free Float (%): 63.3
• Enterprise Value: $195.6m
• 52 Week Range: $0.60 - $2.75
• Shares Out: 61.7m
• Avg. Daily Value: $0.1m

EVENT

Strong trading leads to guidance upgrade. Since the initial COVID-related restrictions in March/April were lifted, strong trading conditions have continued to benefit motorcycle dealerships. Due to demand continuing to outstrip supply (supporting higher GP margins), along with cost savings achieved at the onset of COVID, MTO now expect 1H21 underlying EBITDA to be between $23-25m (excluding AASB-16 but including $6m of JobKeeper). This represents a 15-25% upgrade to prior guidance for 1H underlying EBITDA to be ‘in excess of $20m.’  With supportive industry conditions likely to continue, along with pent-up demand from Victoria as restrictions ease, we believe the 1H21 result will likely be at the top end of guidance.

IMPACT

• Supply demand mismatch to support margins. Unlike the car industry, motorcycle manufacturers are not gearing up to provide additional supply to compensate for factory closures during COVID. While we expect new bike supply to return, given current levels of strong demand (and the strength in MTO’s forward orders), we expect margins to remain elevated for at least the next 3-6 months.
• Pent-up demand in Melbourne could provide upside to guidance. With stores now re-opening in Melbourne, MTO expect to see ‘pent-up demand translate into increased sales.’ While we do not expect the recovery to be as strong as the recovery in May/June, higher GP margins mean Melbourne could provide upside.
• Cost-outs and additional brands to support earnings. While we expect GP margins to normalise once supply returns to normal, MTO has added a number of new brands to existing stores which should support topline growth.
• Solid balance sheet allows M&A optionality when the time is right, noting that buoyant conditions make acquisitions unlikely in FY21.
• True underlying level of demand difficult to discern as we acknowledge MTO has been a beneficiary of redirected spend, early super access and government stimulus, however: (1) with a vaccine on the horizon, consumers may feel less necessity to save; (2) bike sales remain almost 20% below the long term average; and (3) strong kid bike sales may support a new generation of riders.

INVESTMENT VIEW

We upgrade FY21 EPS to capture stronger than expected GP margins, however our FY22-23 earnings and $2.98 TP remain unchanged, BUY.

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08-Oct-2020:  Moelis Australia: MOTORCYCLE HOLDINGS LTD (MTO): BUY: How much faster can this bike go?

Moelis Analysts: 

• Sarah Mann +61 2 8288 5407 sarah.mann@moelisaustralia.com
• Tom Tweedie +61 2 8288 5423 tom.tweedie@moelisaustralia.com

Retailing / Automotive Retail

8 October 2020

COMPANY UPDATE

• Ticker: MTO
• Stock Price: $2.49
• Target Price: $2.98
• Forecast Capital Return: 19.6%
• Forecast Dividend Yield: 4.8%
• Estimated Total Return - 12 Mth Forward: 24.4%

Company market data

• Market Cap: $153.6m
• Free Float (%): 63.3
• Enterprise Value: $189.4m
• 52 Week Range: $0.60 - $2.49
• Shares Outstanding: 61.7m
• Average Daily Value Traded: $0.1m

EVENT

Strong trading continues into 1Q21, with underlying 1H21 EBITDA expected to be ‘in excess of $20m’. Following the easing of COVID-19 restrictions in May, demand for motorcycles has continued to be strong throughout the last five months. EBITDA guidance implies >90% growth on the pcp (or >30% excluding JobKeeper). Liquidity also ‘remains sound’, with strong trading and reduced inventory leading to an improved cash position. Given strong 1Q21 trading along with $6m benefit from JobKeeper in the period, we believe MTO is likely close to a net cash position. While some level of working capital draw down is expected in 2Q21 as supply normalizes, MTO expect to remain significantly under geared with net debt <$10m.

IMPACT

• Industry data released today show that new bike sales grew +30.6% in Sep qtr. While not as strong as the +45% growth in the June qtr, this is a very strong result given the lockdowns currently in place in Victoria. We also note strong sales in the June qtr were predominantly driven by ATV and off-road bikes, with MTO’s core road bike category only growing +2.3%. In the September qtr, however, road bike sales were up +29.7%.
• Melbourne dealerships still selling bikes. MTO initially expected stage 4 restrictions would lead to no revenue out of its 6 Victorian dealerships (~$9m revenue impact). However, despite the lock down, sales continued at 50% of normal trading levels. As a result, we expect a strong recovery once restrictions lift.
• Strong sales, constrained supply (so higher GP) and cost cuts means jump in profitability. Profitability was also helped by reduced head count.
• Balance sheet provides optionality for dividends or the right acquisition in the medium term. In the short term MTO will also benefit from reduced interest expense (bailment and corporate).
• True underlying level of demand is difficult to discern, with sales in the last 5 months supported by early super access and government stimulus, however: (1) with borders remaining closed, redirection of spend away from services to consumer goods should continue to benefit MTO; (2) bike sales are still almost 20% below the long term average; and (3) COVID may have brought a new generation of riders to the industry.

INVESTMENT VIEW

FY21-23 EPS upgrades of 14-23% capture increased gross margins and lower interest costs. Target price moves to $2.98 in line with EPS revisions, BUY.

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31-August-2020:  Moelis Australia: MOTORCYCLE HOLDINGS LTD (MTO): BUY: Ready for rougher roads

Retailing / Automotive Retail, 31 August 2020, COMPANY UPDATE:

• Stock Price: $1.950
• Target Price: $2.56
• Forecast Capital Return: 31.3%
• Forecast Dividend Yield: 3.8%
• Estimated Total Return - 12 Mth Forward: 35.1%

Company market data

• Market Cap: $120.3m
• Free Float (%): 63.3
• Enterprise Value: $156.1m
• 52 Week Range: $0.60 - $2.45
• Shares Outstanding: 61.7m
• Avg. Daily Value: $0.1m

EVENT

Strong result, as expected: Despite COVID-related disruptions in late March/early April, strong performance in June, coupled with $6m benefit from JobKeeper in the period meant MTO delivered underlying EBITDA $27.6m (+53.3%) which was above the top end of guidance ($24-27m EBITDA). Excluding JobKeeper, EBITDA still grew +20% despite weak trading in late March/April. We view this as a very strong result. Revenue was $363.7m (+10.2%), underlying EBITDA was $27.6m (+53.3%), and underlying NPAT was $15.6m (+93.7%). Operating cashflow of $35.5m was very strong (FY19 $19m), leading to a significantly improved net debt position of $8.1m (ex-bailment) leaving MTO significantly under-geared. A special dividend of 5cps was also declared (we had expected no dividend). No quantified guidance was provided. MTO are ‘cautiously optimistic’ about FY21 but it expects ‘sales momentum to temper’ especially if new COVID restrictions are reintroduced. That being said, MTO note that ‘interest in motorcycles has ramped up since COVID-19 and continues to be strong’.

IMPACT

• Strong balance sheet provides protection for any further downside. MTO generated $30.3m in the period with the cash position further improving over July and August. The strengthened balance sheet, along with MTO’s rapid cost reduction in March/April, gives us confidence that MTO will be able to weather any additional downturns.
• Cost-outs and stock shortages to drive margin in the near term expansion. Reduced staff costs, combined with improving gross margins on bike sales should drive margin expansion within the dealership business in the near term. In the longer term the lower cost base means that any pickup in the market will lead to greater operating leverage.
• Strong result helped by government stimulus so tapering presents some risk. While difficult to quantify how much of the strong result came from: (1) one-off government stimulus (JobKeeper, super withdrawals, instant asset tax write off); and (2) a diversion of spend away from services and towards consumer goods, there is no doubt MTO is more leverage to the economy than the car dealers. While 1H21 trading to date has remained strong, we are cautious about the impact of an end to the government stimulus. However, at 10x FY22 P/E, even assuming a weaker trading environment MTO remains too cheap.

INVESTMENT VIEW

We reinstate our earnings estimates with a TP of $2.56/share and BUY rating.

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