1 00:00:04,080 --> 00:00:06,760 Speaker 1: Welcome to the Fear and Greed summer series. I'm sure, Alma. 2 00:00:06,880 --> 00:00:10,160 Speaker 1: Today I'm talking to goreav Soodi, Deputy head of Research 3 00:00:10,280 --> 00:00:14,840 Speaker 1: at Intelligent Investor, and it's all about Australia's largest listed 4 00:00:15,000 --> 00:00:18,800 Speaker 1: car dealership, Eagers Automotive. Remember this is general information only 5 00:00:18,840 --> 00:00:22,120 Speaker 1: and you should always see professional advice before making investment decisions. Graf, 6 00:00:22,200 --> 00:00:23,479 Speaker 1: Welcome to Fear and Greed. 7 00:00:24,000 --> 00:00:25,119 Speaker 2: Thanks Shan. Great to be with you. 8 00:00:26,280 --> 00:00:28,040 Speaker 1: This has been quite the ride and part of the 9 00:00:28,080 --> 00:00:30,800 Speaker 1: pun given it's a car dealership. Eagers over the past 10 00:00:30,800 --> 00:00:33,360 Speaker 1: twelve months or so more than double its share price, 11 00:00:33,479 --> 00:00:36,560 Speaker 1: although sort of October or so it is even high. 12 00:00:36,560 --> 00:00:38,279 Speaker 1: I think it's off about thirty percent. Since it's high 13 00:00:38,280 --> 00:00:41,600 Speaker 1: as in October, tell me the Egers Automotive story. Why 14 00:00:41,600 --> 00:00:43,000 Speaker 1: has it done so well this year? 15 00:00:43,920 --> 00:00:47,280 Speaker 2: Eiggers is a stock we've owned for a bit over 16 00:00:47,400 --> 00:00:50,680 Speaker 2: a year or so. It is a it is as 17 00:00:50,680 --> 00:00:53,040 Speaker 2: you say, it's show's largest car dealership. And I think 18 00:00:53,080 --> 00:00:57,279 Speaker 2: there's car dealerships in general are not well understood, not 19 00:00:57,320 --> 00:01:00,520 Speaker 2: just in Australia but overseas as well. If you look 20 00:01:00,560 --> 00:01:05,800 Speaker 2: at car dealerships that are privately owned, these things are 21 00:01:05,880 --> 00:01:09,320 Speaker 2: incredibly incredible generators of wealth. There was a survey done 22 00:01:10,760 --> 00:01:13,160 Speaker 2: earlier in or earlier this decade. It was in the 23 00:01:13,160 --> 00:01:16,640 Speaker 2: twenty tens or twenty twenties. It was done, and it 24 00:01:16,720 --> 00:01:19,399 Speaker 2: was a survey of how wealth was accumulated in the 25 00:01:19,520 --> 00:01:23,360 Speaker 2: United States, and the number one way thember, the most 26 00:01:23,360 --> 00:01:27,679 Speaker 2: predictable and assured way of getting rich in the United 27 00:01:27,720 --> 00:01:31,600 Speaker 2: States was to own a car dealership. Group they are 28 00:01:31,959 --> 00:01:35,000 Speaker 2: I think that it's the number one profession for yacht 29 00:01:35,000 --> 00:01:37,880 Speaker 2: owners in the US, and in this survey it came 30 00:01:37,920 --> 00:01:42,240 Speaker 2: out number one as well. So and public markets, stock 31 00:01:42,319 --> 00:01:46,040 Speaker 2: markets all over the world tend to value these things 32 00:01:46,040 --> 00:01:49,520 Speaker 2: at very low multiple. So the way we came to eagers, 33 00:01:49,560 --> 00:01:52,600 Speaker 2: we saw this great disconnect. Actually, to be honest with you, Sean, 34 00:01:52,920 --> 00:01:56,560 Speaker 2: I was watching Cobra Kai on Netflix, and I noticed 35 00:01:56,560 --> 00:01:58,920 Speaker 2: that they wanted to show, you know, the main character, 36 00:01:59,000 --> 00:02:02,080 Speaker 2: Daniel Son as a wealthy, successful person, and then his 37 00:02:02,240 --> 00:02:04,880 Speaker 2: character changes, so they made him a car dealer, and 38 00:02:04,920 --> 00:02:07,240 Speaker 2: I just that's what clicked with me. I thought, there 39 00:02:07,320 --> 00:02:10,520 Speaker 2: is something wrong with the way car dealers are in 40 00:02:10,560 --> 00:02:12,480 Speaker 2: real life, how successful that in real life, and how 41 00:02:12,560 --> 00:02:15,040 Speaker 2: they're treated on the share market. Now, on the share 42 00:02:15,080 --> 00:02:18,959 Speaker 2: market they're treated as low multiple cyclical, capital intensive businesses 43 00:02:19,000 --> 00:02:22,280 Speaker 2: because the accounting is particularly complicated. And if we can 44 00:02:22,280 --> 00:02:25,120 Speaker 2: dig through that a complex accounting, what we get to 45 00:02:25,480 --> 00:02:29,600 Speaker 2: is a wonderful business that's dominated by land ownership. A 46 00:02:29,600 --> 00:02:32,440 Speaker 2: lot of dealers actually make their money over time through 47 00:02:32,480 --> 00:02:35,120 Speaker 2: the increase in the land value, because these things are 48 00:02:35,280 --> 00:02:39,959 Speaker 2: essentially land banks that sell decent margin product on top 49 00:02:40,000 --> 00:02:42,760 Speaker 2: of their land, and over generations they make a lot 50 00:02:42,800 --> 00:02:45,359 Speaker 2: of money. So when we invest in eagers, we're looking 51 00:02:45,440 --> 00:02:48,959 Speaker 2: for a very long dated return that pays regular dividends. 52 00:02:48,960 --> 00:02:52,160 Speaker 2: As they move cars and it's not just about moving cars. 53 00:02:52,680 --> 00:02:54,560 Speaker 2: When a car is sold, there's often a trade in 54 00:02:54,560 --> 00:02:58,160 Speaker 2: that that gets bought in. A car is often financed. 55 00:02:58,160 --> 00:03:00,440 Speaker 2: Eighty percent of all vehicles in Australia gets finance, and 56 00:03:00,480 --> 00:03:03,760 Speaker 2: that gets actually a higher margin than the retail sale 57 00:03:03,800 --> 00:03:06,280 Speaker 2: of the car itself. And then there's insurance on top 58 00:03:06,320 --> 00:03:09,560 Speaker 2: which collects the margin as well. So at multiple points 59 00:03:09,600 --> 00:03:12,480 Speaker 2: of the retail chain, the car dealer is there to 60 00:03:12,520 --> 00:03:16,160 Speaker 2: collect a margin and the total margin is actually far 61 00:03:16,280 --> 00:03:19,600 Speaker 2: better than you would expect just from the retailing bit itself. 62 00:03:20,240 --> 00:03:23,639 Speaker 2: And to dispel this myth that they are very capital intensive, 63 00:03:23,639 --> 00:03:26,000 Speaker 2: and they have to hold all this stock. They actually 64 00:03:26,080 --> 00:03:29,239 Speaker 2: don't own any of the inventory. The inventory is owned 65 00:03:29,240 --> 00:03:32,240 Speaker 2: by a finance company and they pay couple hundred dollars 66 00:03:32,280 --> 00:03:34,720 Speaker 2: a month to hold each car, and as that car 67 00:03:34,840 --> 00:03:38,840 Speaker 2: is sold, they pay off the debt group and they 68 00:03:38,880 --> 00:03:41,800 Speaker 2: collect the margin. So it's actually a very capital light model. 69 00:03:41,840 --> 00:03:44,400 Speaker 2: When we did the numbers, we could see that Eagles 70 00:03:44,440 --> 00:03:47,480 Speaker 2: was generating about a twenty percent return on capital, even 71 00:03:47,520 --> 00:03:50,400 Speaker 2: though the reported earnings were a lot lower than that. 72 00:03:50,480 --> 00:03:53,600 Speaker 2: Because of the way the inventory and debt is treated 73 00:03:53,640 --> 00:03:57,480 Speaker 2: by accounting standards. It's all dense, it's all complicated, and 74 00:03:57,520 --> 00:03:59,000 Speaker 2: that's why there's an opportunity. 75 00:03:59,360 --> 00:04:02,280 Speaker 1: Okay, so the shap price has jumped hugely over the 76 00:04:02,280 --> 00:04:05,080 Speaker 1: past twelve months or thereabouts, though it has come off 77 00:04:05,120 --> 00:04:07,520 Speaker 1: as I mentioned, what is the outle I mean, ken 78 00:04:07,920 --> 00:04:11,680 Speaker 1: have people caught on to this idea that Eager's automotive 79 00:04:11,720 --> 00:04:14,200 Speaker 1: is actually I mean, exactly what you're talking about. It 80 00:04:14,200 --> 00:04:16,440 Speaker 1: did have a few announcements during the year which people 81 00:04:16,480 --> 00:04:18,800 Speaker 1: seem to like, including some of the brands it was 82 00:04:18,839 --> 00:04:20,960 Speaker 1: dealing with. But can it keep running? 83 00:04:21,440 --> 00:04:24,359 Speaker 2: Yeah, there's a couple of big changes going on on 84 00:04:24,400 --> 00:04:28,039 Speaker 2: the automotive industry. One is the rise of these Chinese brands, 85 00:04:28,680 --> 00:04:32,720 Speaker 2: and BYD's the largest of those. Now Egers initially had 86 00:04:32,800 --> 00:04:36,400 Speaker 2: a monopoly on BYD on dealerships, and so all the 87 00:04:36,440 --> 00:04:38,880 Speaker 2: new BYD sales are actually going through Egers and so 88 00:04:39,240 --> 00:04:42,880 Speaker 2: you could see those numbers really pile up on Egers books, 89 00:04:43,320 --> 00:04:45,920 Speaker 2: so that caused a bit of excitement. They are no 90 00:04:46,000 --> 00:04:48,680 Speaker 2: longer in a monopoly position, but they do own eighty 91 00:04:48,720 --> 00:04:53,200 Speaker 2: percent of BYD sales still, so we still see volumes 92 00:04:53,240 --> 00:04:57,560 Speaker 2: increasing through BYD sales. The other thing is the electrification 93 00:04:57,800 --> 00:05:00,960 Speaker 2: of cars as well, and that can mean a change 94 00:05:01,080 --> 00:05:04,200 Speaker 2: in the sales model, so certainly more cars being sold 95 00:05:04,200 --> 00:05:07,400 Speaker 2: on leases which actually increases margin for the dealer group, 96 00:05:07,640 --> 00:05:10,560 Speaker 2: or it can mean more turnover of cars as well, 97 00:05:10,560 --> 00:05:13,120 Speaker 2: which again increases the margin for the dealer group, or 98 00:05:13,160 --> 00:05:16,440 Speaker 2: an introduction of new brands. And Eagers has been particularly 99 00:05:16,440 --> 00:05:21,800 Speaker 2: aggressive in attracting new OEMs to Australia and being the 100 00:05:21,880 --> 00:05:24,520 Speaker 2: sole distribution point for those OEMs, and it's because they 101 00:05:24,600 --> 00:05:27,920 Speaker 2: handle the most volume. So size has been a huge 102 00:05:27,960 --> 00:05:30,280 Speaker 2: advantage for this business and you can see of the 103 00:05:30,360 --> 00:05:33,400 Speaker 2: last few years it's market share for new cars has 104 00:05:33,400 --> 00:05:37,000 Speaker 2: increased from about nine percent to almost fifteen percent. They're 105 00:05:37,000 --> 00:05:40,799 Speaker 2: taking market share from others. Even as newcast sales grow 106 00:05:41,480 --> 00:05:45,719 Speaker 2: and as volume grows, margins are actually expanding. It now 107 00:05:45,800 --> 00:05:49,200 Speaker 2: earns almost three times as much margin as the next 108 00:05:49,240 --> 00:05:52,960 Speaker 2: dealer group in Australia and I think that's a sustainable 109 00:05:53,080 --> 00:05:55,120 Speaker 2: lead that may even get larger. 110 00:05:55,680 --> 00:05:58,320 Speaker 1: Fantastic or thank you for talking to fearing Green summer. 111 00:05:58,120 --> 00:06:00,560 Speaker 2: Series pleasure Sean, Thank you that was a. 112 00:06:00,560 --> 00:06:04,039 Speaker 1: GOREV Sadie, Deputy head of Research at Intelligent Investor. Don't 113 00:06:04,040 --> 00:06:06,520 Speaker 1: forget to follow on the podcast. New episodes every day 114 00:06:06,760 --> 00:06:08,840 Speaker 1: during our summer series and regular shows are back from 115 00:06:08,920 --> 00:06:11,560 Speaker 1: January twelve. I'm Schanelma and this is Bearing Greed.