Automotive services and products supplier AMA Group Ltd (ASX: AMA) returned to strong growth with its half year result confirming that its aggressive acquisition strategy is paying off.
The stock jumped over 2% to a seven-year high of 44 cents this morning after management posted a 41.4% uplift in revenue to $43.6 million and 66.7% surge in normalised net profit to $4.4 million for the six months to end December last year.
This puts the group on track to meet my full year forecast of $83.6 million and net profit of $8.2 million, which stands in contrast to its previous year's result when both top and bottom lines fell.
Some had been concerned that AMA's chief, Ray Malone, was biting off more than he could chew as he snapped up no less than three panel beating businesses since June last year and expanded into Queensland.
AMA's panel beating business has traditionally been Victoria focused but it's not only this division that is fueling the growth. The group's bull bar manufacturing business is also growing strongly, although sales from its motor vehicle electrical and cable accessories division slipped 3.3% for the period.
However, the bull bar and panel repair businesses are by far the biggest revenue earners for AMA, accounting for 70% of group sales.
This is why I am confident that AMA can sustain the growth momentum as these businesses still have room to grow.
The question some investors might have is whether AMA is looking fully priced after its 56% share price run over the past year. If anything, the stock is now above my 40 cents discounted cash flow based price target.
However, my valuation doesn't include further acquisitions and I suspect Malone would be looking at other panel beating businesses to add to AMA's portfolio over the course of this year.
The only thing is AMA will probably need to take on more debt to make any meaningful acquisitions. The group's balance sheet is very under geared at this stage with a net debt to equity ratio of around 17% for 2014-15.
Given that the business can borrow cheap, using debt to fund acquisitions can be pretty earnings accretive.
Also, I believe the group can deliver low double-digit organic growth in 2015-16. Longer term investors shouldn't be put off by the stock's seemingly high near-term valuation.
The fact is, quality growth businesses are not easy to find.
AMA is not the only automotive stock to deliver a solid result. Automotive Holdings Group Ltd (ASX: AHE) is another that pleased the market earlier this month.
