AMA:AU - Ama Group

[kab60]

Wanted to get this one out here pretty quickly since the shares have fallen back and I think the risk/reward is quiet good. There's a much more thorough writeup on VIC from before covid19 (when the stock was almost 200 pct. higher).

 

Summary:

 

AMA Group is an Australian vehicle panel repair roll-up - yeah, one for the compounder bros! - with around 100 pct. upside to private-market value. It went through one of the craziest selloffs I’ve seen after weak Q1 results following a large acquisition, bad headline numbers and a dividend cut which I suppose spooked retail investors.

 

Add Covid19, a misunderstanding of AMA’s covenants, and it seems you had a perfect storm with AMA trading down to 0,15/share or around 100m AUD marketcap just six months after raising around 250m AUD in equity at 1,15/share (and trading at 1,5/share before that). Not long after AMA Group put out a release where it said things were basically fine and covenant tests were postphoned which made it pop from 0,15 to 0,7 in rapid fashion before falling back to 0,5ish.

 

AMA Group is led by a founder with skin in the game, operates in a very resilient and fragmented industry where it takes advantage of private-to-public arbitrage buying subscale, mom-and-pop shops and plugging them into its network - the largest in Australia and the only real platform limiting competition for deals.

 

Company description:

 

AMA Group first and foremost repairs vehicles at its Australian and New Zealand shops under different group names like Gemini, Capital SMART (transformative acquisition in fall 2019)

 

Thesis point 1:

 

Blackstone agreed to buy AMA Group in 2018 for around 10xebitda but deal fell through after an adverse tax ruling).

 

To understand the potential of the model, check out Boyd Services in Canada which is a 20 bagger in ten years and trades at 13-15xebitda.

 

Thesis point 2:

 

After closing the Capital Smart acqusition for some 400m in 2019, Q1 results spooked investors with profitability slipping. The issue is that modern cars are full of electronics, and AMA’s pricing model with insurers - its customers are mainly 5-6 insurers in Australia - didn’t capture the cost inflation fast enough. Since then all insurer contracts have been renegotiated which puts normalized earnings power (per management) at some plus 100m ebitda (brokers had estimates of some 115m before covid19). That compares to a marketcap of 400m today and net debt of some 200m.

 

Thesis point 3: Traffic in China is up after covid19, and generally a 10 pct. increase in traffic leads to a 25 pct. increase in accidents as per AMA Group CEO. It’s not significant to the thesis, but Australians quitting public transport, going on vacation in their cars in their home country etc might actually provide a tailwind. Per a recent interview, AMA Groups’ volumes in June were already at 90-95 pct. of last year. Since then some states have closed their borders again, but I suppose that too shall pass.

 

Thesis point 4: While assisted driving systems etc might limit accidents in the future, they’ll be more expensive to repair. Thus provide Australia with a long runway of growth. At the same time Australia, unlike a lot of countries, have a net growing population due to migration (at least before covid19). The repair market in Australia is 7b today, AMA Group is at 1b in revenue, so there’s a long growth runway ahead. Most mom and pop shops have a hard time to keep up with the increased cost of calibration equipment etc to service newer vehicles, mainly a looking to retire, so there should be lots of bolt-on deals at low valuations for a long time to come.

 

Bonus: Forager Funds, an Australian Fund (which has done quiet well internationally, less so at home) is long. There's a long interview with the CEO, published a few days ago, which basically tells the whole investment case here: https://www.eurekareport.com.au/investment-news/ama-group-expecting-rise-in-vehicle-crashes-post-covid/148298?v=1033619 (free to signup for an account - I might also be able to DM).

 

Anyone following and have some pushback?

 

Disclosure: I'm long

 

[kab60]

Results out, weaker than expected and I don't like the commentary from management. They seem too focused on growth, too unfocused on profitability. Sold my whole position at the open. Will have to reasses. Anyone else following?

[Spekulatius]

Results out, weaker than expected and I don't like the commentary from management. They seem too focused on growth, too unfocused on profitability. Sold my whole position at the open. Will have to reasses. Anyone else following?

 

Agreed, going through the annual report, it seems that they seem to be focused on growth rather than operational excellence.

 

I also noticed a strange error in their annual report head page. That’s a pretty big yellow flag.

With our focus on acquisitions, the Group acquired the New Zealand based Fully Equipped business in January 2021.

[SI2020]

Can you explain how results were below expectations? Boyds revenue and margins were also down, isn't that expected in a lockdown with less driving? Thanks.

[kab60]

Can you explain how results were below expectations? Boyds revenue and margins were also down, isn't that expected in a lockdown with less driving? Thanks.

It was a very quick decision since I expected a large selloff and mostly based on a combination of lack of urgency in restoring margins, taking a large impairment and calling it prudent (instead of saying we overpaid) while talking loads about growing and not owning up to subpar execution and comitting firmly to 10 pct margins. Still going through the AR, and read the transcript, and perhaps I sold too quick. AR has some interesting numbers around CGU's which makes it possible to somewhat establish a guidance range. Seems they increased the discount rate quiet a bit. Still pondering what to do now.

[samwise]

Fireworks!

 

CEO has sued the company so they can't fire him. https://themarketherald.com.au/ama-group-asxama-plunges-as-ceo-faces-legal-proceedings-2021-01-27/.

https://amagroupltd.com/wp-content/uploads/2021/01/Update-in-relation-to-Companys-CEO.pdf

 

Why do they want to fire him (I assume they do, otherwise why would he sue)? Well there were allegations by an employee in Sep 2000, so 5 months ago. Then there was a forensic investigation by this firm McGrath Nicol, which seems to also look into forensic details about fraud: https://www.mcgrathnicol.com/insight/international-fraud-awareness-week-watch/

 

Stock crashed 20%, but seems to be recovering. I am a bit surprised that it is recovering given the whiff of fraud about which the company has said nothing.

 

Anyone following. Any views? Is this probably fraud and a zero like wirecard? Or is this a buying opportunity because the underlying company is good?

 

I'm just watching.

[kab60]

I agree, it is a very bizarre situation with the CEO suing the Company for repressing his minority shareholder rights. I got tired of their execuses and sugarcoating, but I didn't exactly foresee anything like this. :o

 

I doubt this is anything like Wirecard, just the nature of the business and Blackstone doing due dilligence and almost buying the Company back in 2018, but their last big acquisition obviously gives some room to hide stuff.

 

Anyway, the company is pretty cheap if one believes they're not far off their 10 pct. margin targets, and the press release does state things are going well operationally. But I also don't think one gets compensated for the risk of some really bad stuff surfacing, so I'm not at all considering going back in. It's not like the board is helping much with their statement that raises more questions than it answers, so frankly I think there are much better risk/rewards around elsewhere.

[samwise]

I've been buying on the following thesis.

 

1. Worst Case: Rhymes with history: Growth, operations  not so good. Then I haven't overpaid by much.

 

2. Best case: Rhymes with Boyd. Growth, great operations. Cheap.

 

Alternate scenario: They sell to private equity with scarcity value as the only at-scale platform in Australia. They just sold off the bothersome subsidiary which prevented the Blackstone buyout a couple years ago. Seems ready to sell now.

 

the CEO scandal: Lots of people have investigated this company, so I doubt big cockroaches are hiding here.

1. Five months of forensic investigation has revealed 1M over-expensing by the ex-CEO. Thats not a risk to the business, but probably means there are weak internal controls.

2. Blackstone had done diligence on the old business. AMA might have overpaid for the Suncorp acquisition, but its probably not a fraud either.

3. Mittleman is also buying, making this a >10% position, probably from their AMX winnings. So they must have done some investigation as well.

 

New CEO has promised to focus on operations and basics of the business and controls, appropriate for a large company. Reasons to think that the future will not be like the past. We should know in three years which scenario actually happens.