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.
Alex, well executed, with follow through…
whilst one swallow doesn’t make a summer…
this small, founder-run business, makes for opportunities of growth and ongoing passion
Hi Alex,
How does the investment thesis held up with the 2020 half year sales figures released by the FCAI?
Thesis: “With public transport suddenly less appealing, motorcycles present a cheap way to get around.”
“The new motorcycle sales market should see a benefit from lone transit riders for a while to come. ”
Sales Figures: “Road sales down 2.7 per cent and Scooter sales down 12.8 per cent.”
Thesis: “And farmers are having their best season in a long time, increasing demand for ag bikes.”
Sales Figures: “That 50.9 per cent boost in ATV/SSV sales is largely driven off the back of the looming deadline for the fitment of roll over protection systems that has seen brands such as Honda, Yamaha, Suzuki and Polaris declare their intention to stop selling their ATV machinery in Australia.” – a one-off event driven by legislation which will turn into a sharp drop in ATV sales for the coming financial year.
Source:
https://www.mcnews.com.au/motorcycles-sales-figures-2020-australia/
Hi Steve,
If I may, add a little colour to data quoted. It’s true the road bike market was down slightly at June 30. However since then it has increased considerably, so much so that supply is a bigger concern rather than lack of enquiry. Having said that, even with restricted supply,
sales of both road and off road are considerably higher than last year. Strong demand and tighter supply has meant that gross margins have increased materially.
In regard to the increase in agricultural sales, the 4 wheelers or ATV’s that you refer to will be available for at least another 12 months and not all manufacturers are withdrawing from the Australian market. Importantly the sale of agricultural side by side 4 wheelers are not effected by the change of legislation at all but have also enjoyed similar growth to the traditional ATV’s.
Customer forward orders for all products are the highest that I have ever seen and will underpin volumes and margins for some time yet. The renewed interest in the motorcycle industry is continuing but it should be noted that we are coming from a relatively low base with the previous 3 years’ sales contracting.
Thank you.
David Ahmet. CEO.
Motorcycle Holdings.