Should you buy, hold or sell Amotiv shares?

Amotiv (ASX:AOV) listed on the ASX in 1962. Until recently, the business never really fit neatly into a classification as it has undergone multiple transformations throughout its life.

In 2010, 44% of operating income came from the consumer products division. This included the electrical appliances brand Sunbeam and Oates cleaning products.

28% of operating income was from the automotive division and 25% from Davey Water Products. The remainder was from the security division. Prior to that it even owned Victa Mowers.

The history of Amotiv

Throughout its history, it has been known by the slightly unusual name of GUD. But in late June it changed its name to Amotiv Limited.

This reflected the change in the business from a diversified industrial portfolio to the pure-play automotive parts and accessories business that it is today.

It sold the last of its other businesses, Davey Water Products last year, to complete the transition from conglomerate to pure play.

Initially, this transformation has led to a substantial uptick in margins and returns. Over the last two years, the operating margin has gone from 9.5% to 17% and return on equity has gone from 4.5% to 10.9%.

Looking at the strength of the balance sheet, Stockopedia calculates the bankruptcy risk, using the Altman Z-score, developed in 1968 by Professor Edward Altman. Two years ago it was in the distress zone, but has now moved into the cautious zone.

It is held back by the low proportion of liquid assets and the low level of sales compared to assets. It has been paying down debt at a rapid rate, and in financial year 2024 it reduced its borrowings by $66 million. The net debt-to-equity ratio is now down to 35%.

The total assets includes a high proportion, 62%, of intangible assets, both goodwill and identifiable intangible assets such as brands and customer relationships, reflecting the high level of acquisitions over recent years.

In January 2022 it acquired Melbourne-based Auto Pacific Group (APG) which led to revenue almost doubling in size. Overall the balance sheet is solid and improving but the points mentioned above are worth keeping an eye on.

Profit reporting

For reporting purposes it divides its operations into three segments:

• 4WD accessories and trailering
• Lighting, power and electrical
• Powertrain and undercar

Revenue is split fairly evenly across the three segments. Across these segments it has a host of different brands and products. Many are manufactured internally and others are sourced from external suppliers and distributed.

It remains focused on the two-pronged approach to growth via organic growth as well as acquisitions. In November of 2023 it acquired Rindab AB, a European lighting specialist, providing a beachhead for greater penetration into Europe. Then in January of this year, it acquired Caravan Electrical Solutions for $19 million.

The share price has had a bumpy ride in recent times, but overall it has fallen about 13% over the last six months. This reflects the weakness in retail spending with most discretionary segments experiencing declining sales over the last year, along with the realisation that interest rate relief is unlikely to come as soon as people were hoping.

Revenue (excluding the discontinued Davey Water Products) grew by 7.7%, with 5.2% coming from organic growth and the rest from acquisitions. Earnings per share grew by 6.4%.

The impact of cooling new car sales

New car sales have been growing in Australia since 2020, but are expected to show a small decline in calendar 2024. Likewise after three years of strong sales growth for caravans and RVs, 2024 is expected to be a bit softer. New vehicle sales in New Zealand experienced a significant decline over the last 12 months.

While new car sales are one of the revenue drivers for Amotiv, they are only part of the story. The bigger drivers are the car parc, that is the total number of vehicles on the roads, along with the average age of vehicles. Both of these have been increasing and are forecasted to continue doing so.

The average vehicle age has increased from 10.7 to 11.7 years over the last five years, as people hold onto their cars for longer. Older vehicles have a higher service requirement which is favourable for many of Amotiv's Automotive brands.

Over the past three years electric vehicles and hybrids have gone from 8% of new car sales to 21%. Amotiv is very cognisant of the risk this poses to some of its product lines, although it is a situation that will evolve slowly given the overall car parc is still dominated by internal combustion engine vehicles and will be for a long time.

75% of Amotiv's revenue is now agnostic as to whether the vehicle has an EV or ICE powertrain. It has also established a business called Infinitev specialising in battery lifecycle management.

As well as organic growth, Amotiv is also looking to expand through investment. It is making a push into South Africa which has a similar car market to Australia with an emphasis on pick-up trucks. It is also a manufacturing hub for such vehicles and Amotiv will set up a manufacturing facility there for 4WD accessories and already have a contract with an OEM.

Following the solid results announced for FY24 last week, market analysts are forecasting continued growth in 2025 and beyond. Revenue is predicted to grow by 5% and EPS by as much as 17%.

The forecast PE ratio is only 12.8 and the forecast dividend yield is 4.1% fully franked. The cost of living challenges in Australia and economic woes in New Zealand have put some pressure on the business but it appears to be well positioned to continue driving forward.

Disclaimer: The author has holdings in AOV.

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