Allomak (AMA)

Allomak (AMA) – caped at circa $45m – is an aggregator of companies involved in the auto aftermarket industry. This means Allomak’s investee companies are involved in products and services used in the repair and maintenance of vehicles. The auto aftermarket is as boring as dogs balls (ask Repco) and only grows at GDP sort of rates in a good year. Allomak’s companies are said to growing at multiples of this, however, and published and forecast revenues back this up.

The businesses: Acquired companies are said to be “leaders in niche areas of the automotive aftermarket.” I wouldn’t know a leading niche automotive aftermarket company if it came up and bit me. Since listing AMA has acquired the following businesses all for around 3-5x EBIT.

Track record: None to speak of.

Management: Rob Allan is the MD, founder and major shareholder. He’s about 40, ex-McKinsey (isn’t everyone these days?) and spent most of the last 10 years working in venture capital. The VC part scares some people but should come in handy given the number of deals AMA will have to do to grow to a credible size.

Macro: GDP type growth in auto aftermarket generally driven (bad pun) by new car sales, age of national fleet and in the very short-term weather has an impact (more rain = more car crashes!).

Valuation: If you believe my forecasts for 08 then it’s on 6x PE. These FY08 forecasts assume further acquired growth to the (ultra)tune of at least $1-1.5m NPAT in FY08 which seems pretty achievable. Run rate at the moment is NPAT of $6m.

Free Cash Flow: Despite having ‘auto’ in its name the auto aftermarket isn’t as capital hungry as you might think so AMA is able to payout pretty high divvys. It’s on an 8% yield for FY07 although this 70% payout ratio is unlikely to be maintained (unless the share price needs a boost) as AMA will need the cash to pay down the gearing from the acquired growth.

Balance Sheet: The balance sheet for growth via acquisition stories is important and so it’s good to see AMA had net debt of just $1m at 1H07 which will put net debt at June around $6-8m.

Major Criticisms/Bear Case: AMA is a listed private equity company involved in a deeply unsexy industry with no track record.

Bear Case II: Growth via acquisition model’s such as AMA benefit heavily from public to private multiple arbitrage (ask PGA), if AMA’s multiple stays where it is or, heaven forbid, falls then they begin to rely more and more on operational improvements to get their ROI. The problem with this is you are being asked to back management’s operational skills. Bizarrely, aggregation stocks benefit when their multiples are high. In the meantime AMA is stuck buying businesses largely with debt as issuing scrip is only marginally accretive. The danger is AMA max out their balance sheet buying a whole heap of businesses, don’t get the operational benefits, current shareholders continue to demand high divvys all before the market wakes up to the story.


The opportunity: It is not too much of a stretch to think that AMA could earn $8m NPAT next year. Put these earnings on a lowly 8x PE and you get a market cap of $64m or a share price of around 60c. Clearly this is a base case and a large or timely acquisition presents upside.

Final Call: Not an outstanding business (note the focus on valuation) but the downside is limited by the current yield and if the market re-rates this thing then it won’t be too much of a stretch too think you could double your money.

An open invitation

Welcome to what I hope will become Australia’s best site for the discussion of Australian industrial stocks. As a full time investment analyst at a fund manager I come across a number of stocks that are worth a punt but for whatever reason are not appropriate for my employer’s portfolio. Some of these ideas are too good to waste, so they end up here. My hope is that this page will attract some reasoned fundamental analysis of Australian and perhaps international listed companies. We shall see. Of course feel free to email me your own investment theses and I’ll give them a run too.