The latest ASX 200 buy idea from Macquarie

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The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index may have rallied hard since the start of 2019 but there are still good value stocks worth picking up even as bargains look increasingly difficult to come by.

Those looking for good buys might be keen to know that Macquarie Group Ltd (ASX: MQG) has initiated coverage on AP Eagers Ltd (ASX: APE) with an “outperform” recommendation following the car dealership’s merger with rival Automotive Holdings Group Ltd (ASX: AHG).

The broker thinks the tie-up is “strategically and financially compelling” and there is around an 18% upside in the stock over the next 12-months (capital gain and dividend).

Bigger is better

“Eagers Automotive Group Limited (APE) represents the merger of Australasia’s largest Automotive retailing groups, AP Eagers and Automotive Holdings Group,” said Macquarie.

“The core business is owning and operating motor vehicle dealerships, providing fullservice facilities covering new & used vehicles sales (incl. Trucks), servicing, spare parts and the facilitation of consumer finance.”

There are three key reasons why the broker is feeling bullish towards the expanded group. The first is the anticipated turnaround in automotive sales, which have been in a 17 consecutive month decline – which is longer than the slump during the GFC when sales fell for 15 straight months.

“Credit availability has been the key driver of the current downcycle (although clouded by pre-reporting practices in CY18), impacted by the ASIC review and Banking Royal Commission,” said Macquarie.

“However, recent feedback suggests improving credit availability. Housing price growth should support demand (highly correlated), particularly if recent trends sustain.”

Synergies galore with capital management option

The second reason is the potential for significant synergies from the merger. Macquarie noted that Eagers Automotive can achieve $30 million in savings a year within the first 12 months as the combined group can remove duplicate structures and middle management.

Further savings can also be potentially achieved in the short-term from the supply chain, funding, back-end services and rationalising underperforming business units.

The third reason to buy the stock is the potential for capital returns, although this is dependent on the new group meeting its gearing targets.

“Announced & targeted asset sales imply $380m+ in proceeds. Franking credits release is expected to be in focus (~$290m balance), with dividends or off-market buybacks under consideration,” added the broker.

“Industry consolidation is expected to continue with the acquisition environment conducive; a strengthened balance sheet sees APE well positioned.”

The broker has a 12-month price target of $15.60 per share.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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