AOV: Aftermarket Parts Maker - The Deleveraging Nobody's Pricing
AOV: Aftermarket Parts Maker - The Deleveraging Nobody's Pricing
In a Nutshell
Executive Summary
In a Nutshell
Amotiv manufactures and distributes automotive aftermarket parts across ANZ through brands including Ryco filters and Narva lighting. At A$8.22 versus fair value A$11.77, the stock offers 43% upside. The market is pricing permanent earnings impairment despite strong free cash flow generation ($96 million annually) funding rapid deleveraging from 1.95× to below 1× net debt within three years—value that accrues entirely to shareholders but is absent from today's 7.2× EV/EBITDA multiple.
Investor Profiles
| Profile | Rating | Rationale |
|---|---|---|
| Income | ★★★★☆ | The 5% dividend yield is well covered by free cash flow ($96 million forecast against $56 million dividend commitment). The 46% payout ratio leaves ample room for increases as deleveraging progresses. Dividend growth should track earnings at 2-4% annually—modest but sustainable. |
| Value | ★★★★★ | Trading at 7.2× EV/EBITDA versus the peer median of 11×, the stock is undervalued by 43% on our blended analysis. The 13% free cash flow yield at the current price provides a substantial margin of safety. The disconnect stems from market concerns about gross margin compression (down 170 basis points over three halves) that we assess as cyclical rather than structural. |
| Growth | ★☆☆☆☆ | Organic revenue growth of 3% reflects a mature ANZ aftermarket with limited expansion runway. Geographic diversification (US/EU now 10% of revenue, growing 15-20%) offers optionality but won't materially shift the needle for 3-5 years. This is emphatically not a growth stock. |
| Quality | ★★★☆☆ | Mid-tier business quality (5.3/10) with a narrow moat lasting 5-7 years. Return on invested capital of 13.5% is only 2 percentage points above the cost of capital—thin value creation. The $190 million APG impairment within three years of acquisition raises legitimate questions about capital allocation discipline. |
| Thematic | ★★☆☆☆ | The defensive aftermarket model (wear-and-repair tied to a 20 million vehicle parc) provides late-cycle resilience, but 15% of revenue faces long-term EV transition risk. No compelling structural tailwinds beyond incremental geographic expansion. Distributor consolidation may permanently shift bargaining power away from manufacturers. |
Best fit: Value investors. The combination of a 43% discount to intrinsic value, 13% free cash flow yield, and a clear deleveraging path creates a classic value opportunity. The thesis requires no growth heroics—just stabilised margins and disciplined capital allocation. Patient capital willing to wait 12-24 months for the market to recognise the cash generation quality will find the risk/reward compelling.
Executive Summary
Amotiv manufactures and distributes automotive aftermarket parts across Australia, New Zealand, and emerging US/EU markets. The company operates through three divisions: Powertrain (filters, steering, brakes), Lighting & Electrical (Narva, Vision X), and 4WD accessories. Revenue comes 60% from recurring wear-and-repair demand and 25% from OE fitment to vehicle manufacturers.
First-half FY26 results showed 3.3% revenue growth to $514 million but EBITA fell 7.5% as gross margins compressed. Two of three divisions performed well—Lighting (+23% margin) and Powertrain (+23% margin)—but 4WD margins collapsed 340 basis points on cost inflation and product mix. Management secured out-of-cycle OE pricing for the second half.
The investment case rests on cash generation, not growth. Free cash flow of $96 million (13% yield at market price) funds deleveraging from 1.95× to below 1× net debt within three years while maintaining dividends. The market prices permanent earnings impairment ($155 million sustainable EBITA) against our probability-weighted $192 million—a 20% disagreement worth $3 per share. Key risk: capital allocation discipline as surplus cash builds.
At A$8.22 versus fair value A$11.77, the stock is 43% undervalued.
Results & Outlook
What happened?
First-half revenue rose 3.3% to $514 million but EBITA dropped 7.5% to $98 million. Gross margin compressed 100 basis points to 42.4% as cost inflation outpaced price recovery—a pattern across three consecutive halves. The Powertrain division grew 4.9% with stable workshops maintaining vehicles rather than replacing them. Lighting & Electrical delivered 23% EBITA margins after cutting Australian operating expenses 12%. The 4WD division suffered as pickup truck volumes fell 7% in January and product mix shifted toward lower-margin South African manufacturing.
Key Metrics
| Metric | FY25E | FY26E | FY28E |
|---|---|---|---|
| Revenue ($m) | 1,014 | 1,045 | 1,108 |
| EBITDA ($m) | 228 | 228 | 242 |
| EBITDA Margin (%) | 22.5% | 21.8% | 21.8% |
| Free Cash Flow ($m) | 73 | 96 | 111 |
| Net Debt/EBITDA (×) | 1.95 | 1.54 | 1.03 |
| DPS (cents) | 40 | 42 | 46 |
What's next?
Management guides to full-year EBITA of approximately $195 million with first and second halves balanced. The key catalyst is 4WD margin recovery in the second half as out-of-cycle OE pricing secured in Q2 flows through—we model 50 basis points of improvement. The Amotiv Unified cost reduction program continues with Wave 2 and 3 delivering further savings through FY27. Free cash flow should accelerate as working capital normalises and capex remains at maintenance levels (2.4% of revenue). Geographic expansion sees US/EU growing from 10% to 12% of revenue by FY28, providing modest diversification. The balance sheet trajectory is clear: net debt falls from $394 million to $250 million within two years, crossing below 1.5× EBITDA in first-half FY27 and potentially unlocking buyback capacity.
Valuation & Risks
| Metric | Value |
|---|---|
| Fair Value | A$11.77 |
| Current Price | A$8.22 |
| Upside | +43% |
| Fair Value Range | A$8.83 – A$14.71 |
| Expected Return (3yr) | ~11.5% p.a. |
Fair value of A$11.77 reflects blended weighting: DCF (26%), trading multiples (59%), and transaction comparables (15%). The DCF captures deleveraging value as $70-120 million annual free cash flow reduces net debt by $250 million within three years—equity accretion that static multiples miss. Our probability-weighted EBITA of $192 million sits 20% above what the market implies at current pricing.
What could go wrong?
Capital allocation discipline is the thesis swing factor. The APG acquisition stands as a cautionary precedent: a $190 million impairment within three years destroyed 27% of deployed capital. As leverage declines below 1.5× during FY27, management will have $150 million+ of deployment capacity. If directed toward dilutive acquisitions rather than organic investment or shareholder returns, fair value compresses from $13.48 (DCF case capturing deleveraging) toward $10.40 (multiples-based floor). We assign 30% probability to this risk with potential impact of $1-2 per share. The APG goodwill itself remains fragile with only $33 million headroom—a 1% EBITDA shortfall triggers $7 million of impairment. Monitor: Net debt crossing below 1.5× (FY27 trigger point) and any M&A announcements above $50 million.