Like Steve McQueen in The Great Escape, Australians are yearning for freedom. We might not be able to travel overseas. But we can find freedom at the handlebars of a new motorcycle.
You won’t see me buying one. But a surge of new and used bike sales have benefited one of our Australian Shares Fund investments, Motorcycle Holdings (MTO).
MTO owns bike dealerships and bike accessory stores and is a wholesale distributor of bike accessories. The business had a market capitalisation of $37m in late March, down 70% from the February peak. Its net debt balance was a scary $68m. The situation looked dire as the company cut costs, sought rent reductions and prepared to bunker down. The Australian Shares Fund had a small investment from February, but increased it by two-thirds in early April.
By late June, Motorcycle Holdings forecast half year profits to more than double from the prior year. It is also swimming in more than $30m of cash. How did the company’s fortunes reverse so suddenly?
A sports bike turnaround
COVID-19 restrictions lifted quicker than many feared while government JobKeeper support kept more people employed and spending. It also meant Motorcycle’s salespeople had a portion of their wages subsidised. With travel off the calendar and access to $10,000 of superannuation, Australians turned to spending on discretionary items like motorcycles. With public transport suddenly less appealing, motorcycles present a cheap way to get around. And farmers are having their best season in a long time, increasing demand for ag bikes.
This government induced spike in spending won’t last; JobKeeper is due to end in September and only one more $10,000 super withdrawal is available. But there has been enough progress for the company to pay down significant amounts of debt, allaying investor concerns. And the industry was at a cyclical low prior to COVID. The new motorcycle sales market should see a benefit from lone transit riders for a while to come.
Lining up the long-term earnings trajectory is going to be impossible with so much noise in the numbers, but this small, founder-run business has been making shrewd acquisitions and increasing its market share while times were tough. It should come out of COVID-19 stronger than it went in, and be stronger again in five years’ time.
This is an excerpt from the upcoming June Quarterly Report – if you would like to receive this report (and all future reports) in your inbox, you can register to do so here.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.