Why I Like Automotive Holding Group Ltd (ASX:AHG) Shares

Automotive Holding Group Ltd (ASX: AHG) is one of Australia’s largest vehicle automotive groups – operating over 115 dealerships across Australia stocking global brands such as Toyota, Ford, and Bentley.

It also has a leading cold storage logistics business with industry leaders such as Harris, JAT and Scott’s all coming under the broader team. Growing rapidly, this division ships millions of pallets of frozen goods across the country satisfying our growing population.

AHG – Popping The Hood

Automotive Holding is a business with a long and successful history, founded in 1952 it has grown rapidly to its ultimate ASX listing in 2005.

Today, the car dealership is their core business, this is not only the largest business segment but contributes a high portion of the overall group revenue. Car dealerships are appealing to investors as it is a high-volume business where low capital requirements can generate high returns. For example, dealerships can buy in bulk and negotiate with the manufacturer.

This has a two-prong benefit for companies like Automotive Holdings.

Firstly, they can mark up the individual vehicle to not only cover the purchasing cost but to ensure the overall business is making a profit. Once the vehicle is sold it provides a solid foundation for upsell opportunities such as financing, servicing, and extended warranty. This business model ensures each vehicle is not only covering its cost but also providing an ‘annuity’ type business for the company (in the form of ongoing services, finance payment, etc).

Watch Consumer Spending

Overall the industry is subjected to several headwinds. However, in my opinion, the biggest threat is consumer confidence and population spending habits.

During difficult times consumers are more willing to invest in their current car instead of making a substantial purchase in a new vehicle. This could be magnified during a recession type scenario where many consumers would lump new vehicle sales in the ‘luxury’ category instead of the ‘necessary’ category when evaluating their spending habits.

Online Threats

Another consideration is the market dominance of online car portals such as Carsales.com (ASX: CRZ) and the impact this will have on traditional dealers. However, the counter-argument to that is traditional online portals have replaced print media and advertising and the dealerships have benefited from an increase in buyer interest and education.

Automotive Holding has grown its network to be the envy of its competitors, with improving sentiment and disposable income I believe this company can continue its positive growth over the long run.

At the time of publishing, Anthony does not have a financial interest in any of the companies mentioned.

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