AMA Group – Good investment even without being target of acquisition

AMA Group Composite Valuation Indicator

Main Points

  • Strong growth coming from both organic and inorganic growth
  • For the vehicle panel repair business, which accounts for more than 85% of revenue, the company integrated 30 new facilities, made 26 acquisitions and opened 4 greenfield centres in 2018.
  • Improved cost and efficiency by centralizing all finance, HR, IT operations into one support centre. Adopting new ERP system from Netsuite
  • Aligned the panel operations under one unified National Operations Team
  • Despite failure of takeover talks by Blackstone Group, the company is a good investment in itself

 

Name of Company Country of Origin/ Exchange Traded Sector Stock Price Target Price
AMA GROUP LTD Australia/
ASX
Consumer Cyclical – Autos – Auto Parts AUD1.09  AUD1.65
@ 01 Sep 2018
COMPANY PROFILE AMA Group Ltd operates in the wholesale vehicle aftercare and accessories market, including smash repair shops, automotive and electrical components, vehicle protection equipment and servicing workshops for brakes and transmissions.
Stock Code AMA
Annual Dividend Yield 2.9%
Market Capitalization AUD578.01 million
SUMMARY
Valuation Based on the Composite Valuation Indicator, the stock has a Target Price of AUD1.65 within a 12-month period. Our Target Price represents upside of 51.3% based on stock price of AUD1.09 as at 01 Sep 2018.
Growth EPS Growth for the company is very positive.
Financial Condition The company’s financial condition is strong.
Quality of Earnings The quality of the company’s earnings is high.
Operational Efficiency The company’s operational efficiency is moderately high.

AMA Group Overview

Valuation
We believe in studying various valuation indicators for a stock. This is because while each valuation indicator has its benefits, it also has its shortcomings. Price to Earnings and Price to Cash Flow Ratios are meaningless when the company has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but assets are not directly related to a company’s profitability.
While it is important to value stocks based on multiple indicators, they sometimes lead to differing views on valuation. One indicator may tell you a stock is overvalued while the other tells you it is undervalued. That is why we use our proprietary Composite Valuation Indicator whenever possible as it gives you one conclusion based on the best combination of the different indicators, to tell you whether a stock is under or overvalued. The graphical format allows you to determine whether or not the composite valuation accurately values the stock and gives you confidence to act on the decision.
In addition, we analyze a long history (typically more than 10 years) so that we can take into account the boom and bust cycles in order to determine the “normal” valuation of the company.

AMA Group PE

The Price Earnings (PE) Ratio is the most frequently used valuation indicator for a stock. However, there are times when this ratio cannot be used e.g. when the company reports a loss or profit is so minimal that it results in an abnormally high PE Ratio. Or Net Profit After Tax may be volatile and it is better to use Earnings Before Interest and Tax (EBIT) to value the company. We use the PE Band or Price/EBIT Band to show whether a stock is overvalued or undervalued based on its historical valuation.
At the price of AUD1.09 as at 01 Sep 2018, Ama Group Ltd is trading at a PE Ratio of 29.0 times last 12 months earnings.  This is a 12.6% discount to current fair Price to Earnings Ratio of 33.2 times. (Price based on the fair PE of the company is indicated by the red line.)

AMA Group Price to Sales

The Price to Sales Ratio is another commonly used valuation indicator for a stock. It overcomes some of the limitations of the Price Earnings Ratio in that it can be used even when the company is not making a profit or only making minimal profits. However, it should not be used by itself because a company may be achieving sales but not profits.
At the price of AUD1.09 as at 01 Sep 2018, Ama Group Ltd is trading at a Price to Sales Ratio of 1.1 times last 12 months sales.  This is a 20.0% discount to current fair Price to Sales Ratio of 1.4 times.

AMA Group Price to Cash Flow

Price to Cash Flow is an alternative method to value shares. This is because accounting profits can be subject to manipulation. Therefore, some investors prefer to value a company based on cash flows generated by the operating activities of the company. It also acts as a reality check to valuation measures such as Price to Earnings and Price to Sales. If a company generates high profits and sales but not operating cash flows, it could be heading for trouble because it is cash that pays the operating expenses. However, the Price to Cash Flow ratio of most firms are volatile and should not be used in isolation to determine the valuation of the stock.
At the price of AUD1.09 as at 01 Sep 2018, Ama Group Ltd is trading at a Price to Cash Flow Ratio of 18.1 times last 12 months cash flow.  This is a 8.0% discount to current fair Price to Cash Flow Ratio of 19.7 times.

AMA Group Price to Book

Price to Earnings, Price to Sales and Price to Cash Flow ratios all value a company based on what it is generating (i.e. profits, sales or cash flow). Price to Book ratio is different in that it values a company based on what it owns (i.e. its net assets). This is usually a suitable valuation indicator for a financial institution, which frequently revalues its assets and liabilities, or a company with huge asset base e.g. utilities company.
At the price of AUD1.09 as at 01 Sep 2018, Ama Group Ltd is trading at a Price to Book Ratio of 3.3 times current book value.  This is a 1.0% premium to current fair Price to Book Ratio of 3.3 times.

AMA Group Dividend Yield

For stocks that have a history of paying meaningful dividends, the stock price is often dependent on how much dividend the company pays.
At the price of AUD1.09 as at 01 Sep 2018, AMA Group Ltd is trading at a Dividend Yield of 2.9%. This is a 25.1% discount to its historical average Dividend Yield of 2.1%.  (Note: The lower/higher the dividend yield, the more expensive/cheaper the stock is.)

AMA Group Composite Valuation Indicator

The Composite Valuation Indicator is derived after finding the combination of valuation indicators that best explains the stock price. It recognizes that looking at a single indicator is dangerous and inadequate. It also overcomes the difficulty of different indicators pointing giving different signals and difficult to act upon if you do not have a composite valuation. Please note, however, that the Composite Valuation Indicator does not account for situations when the market is willing to pay a much higher price for the stock because of an anticipated takeover or some other special event. It is also possible that investors are attributing a lower valuation to the stock than warranted by the near-term outlook because the stock or sector’s long-term prospects are poor.
Based on the Composite Valuation Indicator, the stock has a Target Price of AUD1.65 within a 12-month period. Our Target Price represents upside of 51.3% based on stock price of AUD1.09 as at 01 Sep 2018. We recommend that investors start to take profit after 30% return.
Other Considerations
Of course, in deciding whether or not a stock is attractive, it is more than determining its valuation and future fundamentals. We need to consider other aspects of the stock such as growth, financial condition, operational excellence, cash flow, technicals, etc.
It is difficult to find a stock that is attractive valued and still pass every single criterion of the investor with flying colors. At times, we need to make certain trade-offs. For a full quantitative analysis, you could refer to this report.
Source of Data: Company description, historical financial statements data and price data are from gurufocus.com or moneycontrol.com. Estimates are from marketscreener.com – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.