AP Eagers cruises along with higher profits

Reasonable sales increases and property sales lift the company.

Despite the slow economy, car sales and vehicle auction business operator AP Eagers (ASX: APE) announced a half-year result of a 22% higher profit of $31.4 million, up from $25.6 million achieved in June 2012. Revenue also rose 4% from $1.29 billion to $1.34 billion.

The sales results mirror the statistics from the Federal Chamber of Automotive Industry, which showed that there was a 4.7% increase in new motor vehicle sales in the first six months of 2013 as compared to the same period in 2012, lifting the total to 53,711 units.

Part of the net profit came from the sale of businesses and property of $2 million before tax, as well as $3.9 million in the form of a dividend from its 19.5% shareholding investment in Automotive Holdings Group (ASX: AHE), which itself saw a 16.2% profit increase in 2013. The previous dividend in 2012 was only $0.05 million.

The company operates four businesses — auto franchise retail, truck retail, property. Auto retail profits were up to $29 million from $27.3 million. Auto retail sales accounts for 80.4% of total sales.

Truck retail, making up 16% of total sales, saw a rise in profit from $3.3 million to $4.3 million.

Property holdings were decreased by 4% to $327 million, and produced a profit of $6.2 million, slightly down from the previous period’s $6.3 million. These earnings were from sales of property, partly in a sale and lease back deal.

It announced a new dealership in New South Wales for Land Rover/Jaguar, and expanded brand representations for Subaru in South Australia and Queensland. In 2014, additional representation for Honda, Hyundai and Volkswagen will occur in New South Wales.

One turn of events that could affect sales and leasing was the Labor government announcement of changes to the fringe benefits tax in relation to vehicle leasing, especially for employer provided vehicles.

Already this news has affected such companies as McMillan Shakespeare (ASX: MMS), which does salary packaging administration related to company vehicles, sending its share price crashing from $18 a share down to about $8 before recovering recently to about $12.

AP Eagers said in its report that it is hard to estimate its full effect on the company because it is not clear how it will be implemented, nor if it will be even passed as legislation after the federal election. If Labor loses the election, the proposed change may not occur at all.

The proposal could still affect companies’ decisions on purchasing vehicles until this matter is concluded. In the meantime, AP Eagers announced that it is looking to complete its acquisition of two more Nissan and Renault dealerships in Adelaide by early September 2013.

Foolish takeaway

As the economy recovers, there are still opportunities to pick up growing companies at good price levels. And when the government steps in, causing disruption by half-baked legislation ideas, be ready to capitalise on them hurting short-term share prices with profit scares.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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