ASX small-cap industrials stock AMA Group Ltd (ASX: AMA) has had a rough year to date.
The company operates in the wholesale vehicle aftercare and accessories market in Australia and New Zealand.
Its operations include smash repair shops, automotive and electrical components, vehicle protection equipment, and servicing workshops for brakes and transmissions.
The Vehicle Collision Repairs segment is a major revenue driver for the company. It serves major insurance companies through more than 130 vehicle repair sites in all Australian states.
For the to date, this ASX industrials stock has fallen roughly 34%.
However, yesterday it recovered an impressive 8%.
A new report from Bell Potter suggests this could be the beginning of a longer rally.
Here's what the broker had to say.
Image source: Getty Images
Bell Potter expecting a good third quarter
In yesterday's report from Bell Potter, the broker said it expects this ASX industrials stock to provide a Q3 update later this month.
It said it continues to expect a good quarter with forecast normalised EBITDA pre-AASB 16 of $17.6m.
Importantly, however, our forecast is well above the Q2 result of $10.4m and reflects the typically seasonally stronger volumes in Q3 which we believe were not materially affected by the war in Iran and higher fuel prices.
Petrol prices a major factor
Bell Potter said higher petrol prices are not expected to materially impact Q3 earnings, with the company still on track to achieve around $17.6m in normalised EBITDA.
However, there is some risk to Q4 forecasts if fuel prices remain elevated due to the ongoing Iran conflict, as this could reduce driving activity and, in turn, repair volumes.
Despite this risk, the company may still deliver EBITDA above $20m in Q4 if volumes hold up, as the prior corresponding period was affected by a one-off inventory provision.
Overall, petrol prices are seen as a demand-side risk – affecting how much people drive – rather than a direct cost issue, and a decline in fuel prices would improve the earnings outlook.
Strong upside in tact
Based on this guidance, Bell Potter has slightly reduced its price target to $1.200 (previously A$1.250).
The broker has retained its buy recommendation.
Despite this slight decrease, this target indicates a potential upside of approximately 128% from yesterday's closing price of $0.52.
We have reduced the multiple we apply in the EV/EBITDA valuation from 6x to 5.5x and increased the WACC we apply in the DCF from 10.4% to 10.5% purely for conservatism. We note there is a large difference between the two valuations – $0.92 and $1.47 – but even the lower EV/EBITDA is still a significant premium to the share price. The net result is a 4% decrease in our target price to $1.20 and we retain the BUY recommendation.
