Step 3- Zooming into the future!

The company I have been given is Autosports Group Ltd.

Company Website: https://autosportsgroup.com.au

Annual Reports and Financial Statements: Autosports Group Financials

Key Business Activities: Retailer of prestige and luxury cars.

Here is a short employee onboarding video https://vimeo.com/553150233, working for this firm appears to be an offer to live an extravagant new lifestyle, just like their perspective clients do. “Fun, fresh and fast” they are all about luxury! They may have mentioned it a few times in the video…

A brief history of the firm:

Autosports Group commenced operations in 2006, growing from a single dealership to now operating in over 50 locations across Queensland, Victoria and New South Wales, representing a large variety of brands. They also provide servicing of vehicles, sale of used cars and collision repairs.

KCQ’s- Annual Report 2021:

I will start by saying I was really worried when I saw that I had been allocated a firm in the motor vehicle dealership industry. Other than sports, there’s really no other industry I know less about! Then I discover they’re actually selling prestige and luxury cars, I currently act as a chauffeur to my 6 children in our 2006 Toyota Tarago, so I’m struggling to relate at this point. I’ll start dreaming now…

Well back to the Annual Report, here are some of the KCQ’s that I have identified. First impressions are that this firm is at the top of its game. It is award winning and has managed to make profits even with the world being turned upside down by COVID, in fact it has created the perfect opportunity for Autosports Group to proceed with it’s growth by acquisition plans. Closure of borders, both nationally and internationally, government stimulus payments and consumers opting not to use public transport caused demand to exceed supply and an increase in the new car sales market. As the world recovers or resumes in the aftermath of COVID, to me it seems likely that this demand will drop once again at some point. I assume buying other dealerships, including the land in this time of surplus will ensure that they are setting themselves up into the future. As I read further it states, “Where possible we have also purchased the underlying property when we acquire dealerships which is designed to improve our tangible asset base, reduce finance costs and gain control over the sites we operate from.” This also means that they have a competitive advantage by limiting the availability of appropriate locations for other dealerships. This is similar to Ryman Healthcare’s strategy as discussed in our lectures.

There is also a great deal of discussion regarding activities involving their employees and initiatives undertaken to ensure greater corporate social responsibility. In my opinion this is vital to ensure sustainability.

Reduction of floorplan expense- I had no idea what that was! A quick google search told me that dealerships seek short term finance to cover the costs of purchasing their showroom vehicles, namely this involves interest and insurance expenses. Given the lack of vehicles available for sale, this explains the significant reduction. They appear to be ‘tightening their belts’ so to speak, so this incidental cost saving has aided their plans.

In the Director’s report, the following are specifically noted as being the strategy and focus for Autosports Group, which I believe I have already identified above:

· Continue to focus on the health of our staff and customers especially in locked-down markets

· Maintain the focus on gross margin across all revenue streams on the available revenue

· Settle Bundoora BMW property acquisition and integrate the John Newell Mazda business

· Drive further fixed expense reductions by advancing our site consolidation strategy

· Maintain conservative cash and liquidity disciplines during COVID-19 uncertainty; and

· position the business for a strong rebound post New South Wales and Victoria COVID-19 lockdown

Now to take a look at the Financial Statements. For the most part I believe the accounts and their fluctuations are straight forward and have been justified in the Annual Report. For example, Inventory has decreased considerably in the 2021 year, as discussed this is due to reduced showroom vehicle availability and also the increased difficulty of sourcing parts due to the borders being locked down.

I couldn’t quite remember what ‘Impairment of Goodwill Expense’ was, as it has been some time since I’ve studied, so back to Google I went. I knew that Goodwill was the amount paid above the actual value of the firm at acquisition, a payment for reputation in other words. However, I knew that this is reflected in the Balance Sheet not the P&L. ‘Impairment of Goodwill Expense’ is actually an accounting valuation not a set dollar value. If the expected profits from the acquisition are not realised, firms are able to expense the amount that they assess to be below the market value of the goodwill at acquisition. This is quite a significant amount, $109,174,000 in fact. My research tells me that this needs to be reviewed at least annually in accordance with GAAP. It also suggested that a triggering event may cause such a drop, such as the condition of the economy and changes in the competitive environment. Given that this expense was recorded in 2020, I thought the onset of COVID may have been the cause. After reviewing the 2020 Financial Statement notes, they do in fact state that the uncertainty relating to the impacts of COVID are the reason for this ‘impairment’ valuation. I wonder then, with the upturn they have experienced shouldn’t it be likely that this impairment would have decreased. We assume that the valuation is fair and free from bias.

Although the Firm has received over $10,000,000 in JobKeeper payments from the government for last 2 years, I don’t believe this will have a significant impact on the firm should they not receive these payments in future.

An article from Simply Wall Street titled: Some Investors May Be Worried About Autosports Group's (ASX:ASG) Returns On Capital (yahoo.com) discusses the seemingly worrying Return on Capital Employed ratio as calculated from their financial report, however as this has resulted from their pursuit of growth it can be justified. The article actually acknowledges that Autosports Group could be a lucrative investment.

Autosports Group appear to have implemented a winning strategy as reflected in their 2021 Annual Report. Their proactiveness now should see them well prepared for the future.