Why falling house prices just sent Automotive Holdings Group Ltd’s profit 45% lower

This morning the Automotive Holdings Group Ltd (ASX:AHG) share price tumbled 8% lower to $1.67 after the second-hand car dealing and trucking or logistics business warned trading in the first four months of FY 2018 had been worse than expected.

The weak start to the financial year means AHG is now expecting full year net operating profit in the region between $56 million to $59 million.

The group’s managing director, John McConnell put the blame for the weak result on a couple of factors that are popular economic talking points across Australia in 2018: “The entire private buyer market has been weaker, with the east coast, especially NSW and Victoria, being affected by a falling housing market and the negative flow-on effects to consumer confidence and auto sales“.

It’s no secret that second-hand car sales, where people trade-in to upgrade a car for example, tend to increase when consumers are more confident as to their economic prospects or net wealth and the fall in house prices across Melbourne and Sydney seems to have flowed though into the July – October 2018 period for AHG investors.

The group operates more than 150 vehicle dealerships and claims to have more than 6,000 cars and trucks regularly for sale and plans to cut costs in an attempt to limit the damage from the weak markets across Australia.

In total group operating EBITDA for the first four months of FY 2018 came in at $54.1 million, compared to $63.3 million in the prior corresponding period. This equals a profit drop of 14.5%.

However, higher interest bills and depreciation and amortisation charges over the four-month period have resulted in net profit coming in at just $11.7 million, which is down 45.1% on the $21.3 million delivered in the prior corresponding period.

Management also flagged that it expects the refrigerated logistics business’s good performance to contribute to a stronger second half of the financial year for the group.

Other stocks in the automotive dealing space such as AP Eagers Ltd (ASX: APE) and Carsales.Com Ltd (ASX: CAR) are down 2.5% and 0.3% respectively as investors digest the news that the second-hand car market may be weakening alongside house prices.

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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Automotive Holdings Group Limited and Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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