AUSTRALIA AHG AU Price (at 04:33, 29 Jun 2016 GMT) Outperform A$3.76 Valuation - EV/EBITA A$ 4.09-4.63 12-month target A$ 4.36 12-month TSR % +22.3 Volatility Index Low GICS sector Retailing Market cap A$m 1,152 30-day avg turnover A$m 3.9 Number shares on issue m 306.5 Investment fundamentals Year end 30 Jun 2015A 2016E 2017E 2018E Revenue m 5,242.8 5,568.0 5,804.3 5,973.6 EBIT m 175.2 181.0 191.8 197.8 Reported profit m 88.1 96.8 103.8 107.7 Adjusted profit m 94.2 96.8 103.8 107.7 Gross cashflow m 140.8 147.3 157.3 165.8 CFPS 45.9 48.0 51.3 54.1 CFPS growth % 10.8 4.6 6.8 5.4 PGCFPS x 8.2 7.8 7.3 7.0 PGCFPS rel x 0.79 0.74 0.82 0.86 EPS adj 30.7 31.6 33.9 35.1 EPS adj growth % 6.0 2.7 7.3 3.8 PER adj x 12.2 11.9 11.1 10.7 PER rel x 0.65 0.66 0.76 0.84 Total DPS 22.0 22.5 24.0 24.0 Total div yield % 5.9 6.0 6.4 6.4 Franking % 100 100 100 100 ROA % 9.4 9.1 9.4 9.5 ROE % 14.2 14.1 14.5 14.4 EV/EBITDA x 9.8 9.5 8.9 8.5 Net debt/equity % 116.9 116.7 111.8 108.4 P/BV x 1.7 1.6 1.6 1.5 AHG AU vs Small Ordinaries, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, June 2016 (all figures in AUD unless noted) 29 June 2016 Macquarie Securities (Australia) Limited Where do Auto earnings come from? Event We undertake a deep dive into automotive dealer profitability and make some proprietary estimates of where AHG generates its automotive earnings. Impact Why is this important? Firstly AHG generated 70% of H1 FY16 EBITDA from its automotive dealership business and there has been regulatory concern over future commission payments. Offsetting this, we believe AHG has a large opportunity in the second hand vehicle market. US listed dealers offer insights into Australia. We look at US dealerships where some name investors have purchased holdings in leading stocks. US disclosure is also more complete, allowing us to look at trends that are likely to occur in Australia. Based on our analysis, we estimate AHG generates ~$85m pa in finance and insurance (F&I) commission. We further estimate that each 1% change in the commission rate AHG earns from funders equates to ~$10m in EBIT, or 4.5% of group EBIT. Also the US has some automotive retailing concepts like CarMax that could catch on in Australia. AHG is trialling a similar concept now called easyauto123 and has a much lower used to new car sales ratio than US peers at 0.5x. We estimate each 0.1x improvement in this ratio would add ~$15m to EBIT, or 6.7% to group EBIT. AHG looks oversold on regulatory and logistics fears. AHG is trading at a historically low PE relative, demonstrating the market s concern over both the regulatory inquiry and the outlook for the logistics business. If we were to substitute AP Eagers FY17e automotive multiple of 14.2x into our AHG valuation, we would calculate a share price target of $6.89 per share. We believe the outlook for the logistics business would have to improve considerably for AHG to trade at this multiple. Earnings and target price revision FY16 eps down 3.7% to 31.6cps due to lower assumptions related to the logistics business. FY17 eps down 4.3% to 33.9cps. Our earnings estimates for the automotive division remain unchanged. Price target changed from $4.57 to $4.36. Price catalyst 12-month price target: A$4.36 based on an EV/EBITA methodology. Catalyst: Earnings delivery, particularly from the logistics business. Action and recommendation Whilst we think the performance of the logistics business and concerns over the regulatory review have been hindering the share price, AHG has a large opportunity set in automotive which could drive share price performance until the logistics turnaround begins to take effect into FY18. Please refer to page 19 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Why is this important? AHG generated 70% of H1 FY16 EBITDA from its automotive dealership business. This business has been the main driver of AHG s earnings as the charts below demonstrate. Fig 1 The automotive division has been the main driver of earnings Automotive Sales Automotive EBIT 5,000.0 180.0 4,500.0 160.0 4,000.0 3,500.0 3,000.0 2,500.0 2,000.0 1,500.0 1,000.0 140.0 120.0 100.0 80.0 60.0 40.0 500.0 20.0 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e Fig 2 While logisitcs has struggled to grow organically Logistics Sales Logistics EBIT 1,200.0 40.0 1,000.0 35.0 30.0 800.0 25.0 600.0 20.0 400.0 15.0 10.0 200.0 5.0 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e 0.0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16e FY17e Source: AHG, Macquarie, June 2016 Apart from being important to the overall business there has been regulatory concern over nature of finance and insurance commission payments and how much more growth there is in the automotive business. On the positive side, we also believe there is a large opportunity for AHG in the second hand vehicle market. In this context, we think it is important to try to understand the drivers of dealership profitability in more detail. We discuss this in the following sections. US listed dealers offer insights into Australia Given that AHG discloses only, revenue, EBITDA and EBIT figures for its automotive business, we have looked overseas to gain insights into which parts of a dealership generate earnings. We look at US dealerships where some name investors have purchased holdings in leading stocks. This includes Warren Buffet, who in March 2015 purchased the Van Tuyl group. Van Tuyl at the time was the fifth largest vehicle dealership group in the US with ~US$8bn in revenue and sales volume of ~240,000 cars per annum. Also AutoNation (AN US, not rated) is 18% owned by Bill Gates. 29 June 2016 2
The US groups we have looked at are: AutoNation is the largest automotive retailer in the US. As of December 2015, it owned 342 new vehicle franchises operated from 254 stores. CY15 revenue was US$20.9bn and its current market capitalisation is US$4.8bn. Penske (PAG US, not rated). Penske is the number two automotive retailer in the US with 181 of its 355 franchises in the US. Most of the rest of its franchises are located in the UK. CY15 revenue was US$19.3bn and its current market capitalisation is US$3.1bn. Lithia Motors (LAD US, not rated). Lithia has 139 franchises in the US and CY15 revenue of US$7.9bn and current market capitalisation of US$2.0bn. To put the size of these companies into perspective, there are ~18,000 dealerships in the US with the top 10 dealers accounting for ~7% of the ~17.4m new cars sold each year. US disclosure is more complete, allowing us to look at trends that are likely to occur in Australia. The table below highlights the revenue breakdown of these three vehicle retailers in CY15 by the main revenue streams. Fig 3 US dealership groups revenue breakdowns FY15 Revenue Autonation Penske Lithia Average New 57% 51% 58% 56% Used 23% 30% 28% 27% F&I 4% 3% 4% 3% Parts and Service 15% 10% 9% 11% Other 1% 5% 1% 2% Total 100% 100% 100% 100% Source: Company data, Macquarie Research, June 2016 The above table highlights the reasonably consistent breakdown of dealership revenues with the main difference being Penske which reports wholesale revenue (sales of second hand vehicles to wholesalers as opposed to retail buyers) in other revenue while Autonation and Lithia report this as used revenue. We have detailed the FY15 revenue per vehicle for these groups below which highlights Penske s relative overweight (72%) to premium brands. Fig 4 Penske is relatively overweight premium brands (CY15) New vehicle revenue/unit (USD) Used vehicle revenue/unit (USD) 40,000 39,000 38,000 37,000 36,000 35,000 34,000 33,000 32,000 31,000 30,000 29,000 Autonation Penske Lithia Average 30,000 25,000 20,000 15,000 10,000 5,000 0 Autonation Penske Lithia Average Source: Company data, Macquarie Research, June 2016 AHG does not disclose its revenue breakdown but locally listed peer AP Eagers discloses all of the above revenue streams except for finance and insurance income which appears to be included in new and used revenues. We have detailed its revenue breakdown below for comparison purposes. 29 June 2016 3
Fig 5 AP Eagers CY15 revenue breakdown (F&I not disclosed) Parts and Service 18% Used 20% New 62% Source: AP Eagers, Macquarie Research, May 2016 After allowing for F&I being included in new and used revenues, AP Eagers appears to have a broadly similar revenue profile to the US groups sampled. Its revenue per new unit of $38,600 and used of $24,700 are probably inflated by ~$1,000 per unit for F&I income. It is also worth noting that AP Eagers generates ~11% of revenue from its truck retailing business which would also distort revenue breakdowns and boost unit values (AP Eagers generated ~$133,000 per unit including parts and finance from its truck operations in FY15). Based on the US groups above, we would estimate AHG s FY15 revenue of $4.3bn to be broken down as follows: Fig 6 Indicative AHG revenue breakdown based on US peer averages FY15 Revenue US average AHG New 56% 2,373.9 Used 27% 1,152.6 F&I 3% 148.5 Parts and Service 11% 489.5 Other 2% 104.1 Total 100% 4,268.7 Source: Company data, Macquarie Research, May 2016 We caution against translating this data directly mainly as we believe Australian dealers have a lower penetration into the used vehicle market when compared to the US and also that US dealers sell a wider range of F&I products and have a higher penetration rate than Australian dealers. For example, Lithia Motors estimated in a recent presentation that franchised dealers had 37% of the US used car market while in its AGM presentation last year, AHG estimated that it had 6.6% of the new car market and 1.6% of the used car market. Our US peers generate an average of A$1,750 (at a 70 cent exchange rate) per vehicle in F&I income driven by high penetration rates and products such as service contracts and lifetime oil contracts. Based on Australian averages, we would estimate AHG s annual F&I income to be closer to A$80m, or 2% of its annual revenue. This is more in line with Australian industry averages of ~$2,500 per contract and AHG s 2015 AGM statement that it originates ~$1bn in finance per annum. Further, this would imply a finance penetration of ~30% based on AHG s FY15 volume. The US peers disclose gross profits and SG&A expense which we have detailed in the table below. 29 June 2016 4
Fig 7 US gross margins and SG&A relatively consistent (CY15) US gross margins average ~15% US SG&A averages ~11% 16.0% 12.0% 15.0% 11.0% 14.0% 10.0% 13.0% 9.0% 8.0% 12.0% 7.0% 11.0% 6.0% 10.0% Autonation Penske Lithia Average 5.0% Autonation Penske Lithia Average Source: Company data, Macquarie Research, May 2016 Autonation has the highest gross margin and the low SG&A expense reflecting its status as the US s largest automotive dealer and the fact that it operates only in the US compared to Penske which operates internationally. This carries through into EBITDA margins as demonstrated below where the US only businesses have the highest margins. Fig 8 Australian EBITDA margins below the US average of 4.2% (CY15/FY15) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Autonation Penske Lithia Average APE AHG Source: Company data, Macquarie Research, May 2016 Whilst on the surface, APE and AHG EBITDA margins at 3.8% appear only marginally below the US average of 4.2%, this equates to ~$17m of EBITDA or 10% on AHG s FY15 automotive turnover of $4.3bn. 29 June 2016 5
Diving deeper into this analysis. The US peers also disclose the breakdown of their gross profit by revenue stream. We have detailed this below. Fig 9 US dealerships are reasonably balanced businesses FY15 Gross profit proportions Autonation Penske Lithia Average New 21% 27% 24% 24% Used 11% 13% 21% 15% F&I 27% 18% 24% 23% Parts and Service 41% 42% 31% 38% Other 1% 0% 0% 0% Total 100% 100% 100% 100% Source: Company data, Macquarie Research, May 2016 The table above highlights that the average US dealership generates ~60% of gross profit upfront (from the sale of new and second hand vehicles and finance) and ~40% as ongoing gross profit from parts and service. We believe Penske s higher proportion of gross profit from new and used sales is due to its higher focus on premium brands as discussed above. The table below details the gross margins these dealers generate by revenue stream. Fig 10 Gross margin similar in the end FY15 Gross margin Autonation Penske Lithia Average New 5.6% 7.7% 6.2% 6.5% Used 7.4% 6.1% 11.2% 8.2% F&I 100.0% 100.0% 100.0% 100.0% Parts and Service 43.4% 59.2% 49.2% 50.6% Other 19.1% 1.1% 2.6% 7.6% Total 15.6% 14.6% 14.9% 15.1% Source: Company data, Macquarie Research, May 2016 Again this table highlights Penske s position as a retailer of premium brands where margins are higher on both new cars and parts. Based on the US peers, we have estimated AHG s revenue and gross profits in the table below. Fig 11 Indicative AHG revenue and gross profit breakdown based on US peer averages FY15 Gross profit US Average AHG Revenue Margin New 24% 153 2,374 6.5% Used 15% 95 1,153 8.2% F&I 23% 148 148 99.6% Parts and Service 38% 243 490 49.7% Other 0% 3 104 3.1% Total 100% 643 4,269 15.1% Source: Company data, Macquarie Research, June 2016 We caution again that this analysis probably overstates the proportion of gross profit from F&I due to higher penetration rates in the US and the ratio of used car sales to new in Australia. We have extensively discussed funding above. The ratio of used to new car volumes is detailed in the table below. 29 June 2016 6
Fig 12 Australian listed dealers don t sell as many used cars (ratio of used to new volume) 1.2x 1.0x 0.8x 0.6x 0.4x 0.2x 0.0x Autonation Penske Lithia US Average APE AHG Source: Company data, Macquarie Research, June 2016 US dealers sell more used cars relative to new car volumes when compared to Australian dealers meaning our estimate in Figure 11 that AHG generates ~ 15% of gross profits from used vehicles is probably overstated. We would estimate it is more like 11-12% of gross profits, similar to Autonation which has a similar used to new ratio. In summary, we estimate AHG s sources of revenue and gross profit to be as follows. Fig 13 Macquarie estimates of the breakdown of AHG s FY15 Auto business (A$m) FY15 US average Macqe AHG AHG revenue e US average Macq e AHG AHG GP e AHG margin e Revenue Gross margin New 56% 63% 2,689 24% 36% 234 8.7% Used 27% 23% 982 15% 12% 77 7.9% F&I 3% 2% 85 23% 13% 85 99.7% Parts and Service 11% 11% 470 38% 38% 243 51.8% Other 2% 1% 43 0% 0% 3 7.4% Total 100% 100% 4,269 100% 100% 643 15.1% Source: Macquarie Research, June 2016 Our estimates above back solve to ~$35,500 per new car and ~$26,000 per used car, similar to AP Eagers averages of $38,600 and $24,700 per car. Our F&I estimate of $85m back solves to a 30%pentration rate and ~$2,500 per contract as discussed above. We believe these estimates raise two key issues for AHG. What will the eventual impact be of the ASIC F&I review? And What is the size of the used vehicle opportunity in AHG? We discuss these issues below. 29 June 2016 7
What will be the eventual impact of the ASIC F&I review? AHG disclosed in its half-year presentation that ASIC is reviewing F&I revenues of the automotive dealer industry. Industry press has further stated ASIC is reviewing flex commissions on consumer finance to ensure a fair outcome to consumers. This follows a similar review in the US by the Consumer Financial Protection Bureau effective 2015. We estimate the ASIC review applies to approximately two thirds of AHG s F&I income or about $55m per annum. The balance of F&I income relates to insurance and business finance. For our sensitivity calculation below, we have used AHG s AGM statement that it originates ~$1bn in finance per annum. Fig 14 Each 1% change in commissions equates to ~ $10m in EBIT ($m) with no corrective action from management 180.0 170.0 160.0 150.0 140.0 130.0 120.0 110.0 100.0 FY15 FY16e FY17e FY18e Auto EBIT Flex +1% Flex -1% Source: Macquarie Research, June 2016 It is important to note that the above sensitivity assumes no corrective action is taken by management. We believe that there are several actions that would mitigate the impact of a limitation of flex commissions. Given that dealer finance would become cheaper it is likely that penetration would rise over time. We believe this is a factor in US dealer finance penetration rates (as discussed above) being higher on average than Australia. We also believe that dealers would be less likely to discount vehicles if profits were to fall in areas such as funding and that dealers could implement cost savings as has happened in other sectors such as retail financial services. What is the size of the used vehicle opportunity in AHG? We believe there is a substantial opportunity for AHG in the used vehicle market given its low ratio of used to new sales at 0.5x when compared to the US average of 0.8x as discussed in Figure 12 above. The best of breed peer Lithia has a ratio of 1.0x and in a recent presentation highlighted that the 2015 US used car market at 39.4m units is 2.3x the size of the new market at 17.4m units (similar to Australia at 2.2m and 1.1m units) and 37% of units are sold by franchised dealers. We believe franchised dealers have a much lower used market share in Australia, given AHG has 6.6% of the new market and 1.6% of the used market. 29 June 2016 8
In response to this, AHG is trialling a different used car format, easyauto123.com.au. We believe this is based off the US concept CarMax (KMX US, not rated). CarMax has been a big success since its foundation by Circuit City Stores in 1993. Fig 15 CarMax has grown quickly - store numbers... 200 180 160 140 120 100 80 60 40 20 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e Source: CarMax, FactSet, June 2016 CarMax focuses on retailing second hand vehicles in a customer friendly environment. It aims to address the major sources of customer dissatisfaction with traditional automotive retailers by offering fixed price cars and unbundled services. Customers can choose to purchase items such as finance and insurance separately and at upfront, pre disclosed prices. Customers can also sell CarMax a car and be under no obligation to trade a vehicle. As the charts below demonstrate, this has proved to be a successful strategy. Fig 16 Leading to strong growth in volumes and sales Volumes (number) Sales (US$m) 700,000.0 600,000.0 500,000.0 400,000.0 300,000.0 200,000.0 100,000.0 0.0 FY12 FY13 FY14 FY15 FY16 Cars sold Cars wholesaled 20,000.0 18,000.0 16,000.0 14,000.0 12,000.0 10,000.0 8,000.0 6,000.0 4,000.0 2,000.0 0.0 FY12 FY13 FY14 FY15 FY16 FY17e FY18e Source: CarMax, Factset, June 2016 From a standing start in 1993 CarMax now estimates it has 5% of the 0-10 year old vehicle market in the US. Gross profits are from used cars (55%), wholesaling (16%), finance (14%) and extended protection plans (EPP, 11%). Examples of EPP s include extended service plans and loan gap insurance. Over 60% of customers purchase extended service plans. 29 June 2016 9
Fig 17 Profits and margins are strong and higher than franchised dealers Gross profits and EBITDA strong (US$m) As are margins 2,500.0 16.0% 2,000.0 14.0% 12.0% 1,500.0 10.0% 8.0% 1,000.0 6.0% 500.0 4.0% 2.0% 0.0 FY12 FY13 FY14 FY15 FY16 FY17e FY18e 0.0% FY12 FY13 FY14 FY15 FY16 FY17e FY18e GP EBITDA GP margin EBITDA margin Source: CarMax, Factset, June 2016 Gross margins of ~14% or US$2,100-2,200 per vehicle are higher than the 8.2% average in Figure 17 above. We believe this highlights the opportunity for AHG should its easyauto123 concept take off. AHG has opened its first site in the northern Perth suburb of Edgewater as a trial of the CarMax type concept. It offers a fixed price, hassle free environment with customers able to purchase add on products similar to the CarMax concept. In the chart below we highlight the size of the opportunity for AHG Fig 18 AHG could be generating an extra $46m in EBIT per annum by 2018 if it can get its used to new ratio up to the US average of 0.8x 220.0 200.0 180.0 160.0 140.0 120.0 100.0 FY15 FY16e FY17e FY18e 0.9x 0.8x 0.7x 0.6x 0.5x 0.4x 0.3x Auto EBIT Improved used volumes Used to new ratio (RHS) Source: Macquarie Research, June 2016 Our key assumptions in the above chart are that each used car is worth ~$26,000 and the gross margin is 7.9% (both our estimates of AHG s FY15 average). This highlights that used could be a $40m + EBIT opportunity for the automotive business over time. This would add over 30% to divisional earnings. Each 0.1x turn in the used to new ratio adds ~$15m to EBIT using these assumptions. The opportunity could be materially larger (over 50%) should gross margins similar to CarMax s at ~14%. 29 June 2016 10
AHG looks oversold on regulatory and logistics fears We highlight our NPAT and EBITDA forecasts compared to Factset consensus in the chart below. Fig 19 We are mildly above FY17e consensus estimates for AHG Macq e v Consensus NPAT ($m) Macq e v Consensus EBITDA ($m) 110.0 260.0 105.0 250.0 240.0 100.0 230.0 95.0 220.0 90.0 210.0 200.0 85.0 FY15 FY16e FY17e FY18e 190.0 FY15 FY16e FY17e FY18e Macq e Factset consensus Macq e Factset consensus Source: Macquarie research, Factset, June 2016 We have lowered our forecasts for the Logistics division in recognition of a slowing economy and lower growth from the major food retailers. Our earnings estimates for the Automotive division remain unchanged. We have assumed Automotive revenue growth of $250m or 5% and EBIT growth of $8m or 5% in FY17. This compares to our estimates of a net $235m in revenue and $9m in EBIT acquired over May and June 2016. Our underlying assumption of no organic growth in FY17 makes allowance for any revenue and margin pressure assumed from the outcome of the ASIC review. Fig 20 AHG is trading at an increased discount to the market compared to history AHG absolute PER AHG PE relative 20 ahg-au ASX 200 Industrials 1.2 ahg-au Rolling 36M Mean Mean + 1 Stdev Mean - 1 Stdev 18 16 1 14 12 0.8 10 0.6 8 6 0.4 4 2 0.2 0 0 Source: Macquarie, Factset, June 2015 The charts above clearly highlight that AHG is trading at a low PE relative demonstrating the market s concern over both the ASIC inquiry and the outlook for the logistics business. In the table below we have compared the consensus valuation of AHG to the US peers and AP Eagers. All companies have a December year end except for AHG and we have converted the share prices and market capitalisation of the US listed stocks to AUD at current exchange rates. 29 June 2016 11
Fig 21 AHG is trading at a premium to US peers but a large discount to AP Eagers EV/EBITA PER Dividend Yield Security Price Market Cap FY1 FY2 FY1 FY2 FY1 FY2 Automotive Holdings $3.71 $1,137m 10.8x 10.3x 11.7x 11.1x 6.1% 6.5% AutoNation $63.87 $6,585m 8.0x 8.3x 11.0x 9.9x 0.0% 0.0% Penske Automotive $43.23 $3,688m 6.5x 5.8x 8.2x 7.6x 3.3% 3.5% Lithia Motors $95.28 $2,438m 6.3x 5.6x 9.3x 8.6x 1.3% 1.4% A.P. Eagers $11.70 $2,191m 15.8x 14.4x 21.1x 19.3x 3.1% 3.3% Total/Average $16,040m 8.7x 8.3x 11.5x 10.6x 1.8% 1.9% Hi 15.8x 14.4x 21.1x 19.3x 6.1% 6.5% Low 6.3x 5.6x 8.2x 7.6x 0.0% 0.0% Source: Factset, June 2016. Prices as of 29 June It is worth noting that AHG has clearly the highest dividend yield of the above comparables. When looking at Automotive company valuations we adjust the EBITA and net debt for floor plan funding. This is due to the fact that inventory must be paid for upfront (i.e. there are no creditors). In the analysis below we have adjusted for this. The valuation multiples of AP Eagers are boosted by the large property and investment portfolio. The table below adjusts for these to back-solve the underlying multiple that the automotive business is trading on. Fig 22 We estimate AP Eagers automotive business is trading on 15x CY16 PBT after adjusting for investments and property CY16 CY17 Market cap 2,175.0 2,175.0 Net debt 584.3 528.3 EV 2,759.2 2,703.2 Floor plan 404.1 404.1 Investments 229.0 229.0 Property 249.2 249.2 Adjustments 882.3 882.3 Adjusted EV 1,876.9 1,820.9 Auto PBT 123.9 137.6 Auto PBT multiple 15.2x 13.2x Source: Factset, Macquarie Research, June 2016 In the above table we have used Factset consensus EBIT estimates adjusted for the earnings from the property and investment portfolio from which we have subtracted a $10.5m annual cost of floor plan funding. The investment portfolio is largely made up of a ~20% shareholding in AHG which we have valued at the current AHG share price. We have detailed our AHG valuation in the table below. 29 June 2016 12
Fig 23 AHG valued at 9-10x PTP factoring the logistics business performance into our valuation FY17 Multiple- Low Multiple - High Value - Low Value - High EBITA 191.8 Less floor plan cost 27.0 EBITA excluding floor plan 164.8 9.0 10.0 1482.9 1647.7 Total 164.8 1482.9 1647.7 Less Net Debt 859.0 859.0 Add floor plan 630.0 630.0 Value 1253.9 1418.7 Diluted Shares on Issue 306.5 306.5 Value per share $4.09 $4.63 Source: Macquarie Research, June 2016 In our valuation we have adjusted EBITA for our estimate of FY17e floor plan funding costs and applied a multiple of 9-10x PTP. We have also removed our estimate of total floor plan from net debt so as to match the numerator and denominator in our valuation. Our price target has been set at the midpoint of our FY17e valuation ($4.36). If we were to substitute the average (i.e. FY17e) AP Eagers automotive multiple of 14.2x into our AHG valuation, we would calculate a share price target of $6.89 per share for AHG. We believe the outlook for the logistics business would have to improve considerably for AHG to trade at this multiple though. 29 June 2016 13
Limited (AHE:$3.76) 29-Jun-16 Interim results 1H15(a) 2H15(a) 1H16(a) 2H16(e) Profit & Loss 2015A 2016E 2017E 2018E Revenue 2564.5 2678.4 2748.8 2819.3 Revenue $m 5242.8 5568.0 5804.3 5973.6 EBITDA $m 102.6 113.2 110.6 113.7 EBITDA $m 215.8 224.3 238.1 248.6 Depreciation $m 19.9 20.6 21.4 21.9 Depreciation $m 40.5 43.3 46.3 50.8 Amortisation of goodwill $m 0.0 0.0 0.0 0.0 Amortisation of goodwill $m 0.0 0.0 0.0 0.0 EBIT $m 82.7 92.6 89.2 91.8 EBIT $m 175.2 181.0 191.8 197.8 Net Interest expense $m 17.5 16.1 16.6 17.9 Net interest expense $m 33.6 34.5 35.4 35.8 Pre-Tax Profit $m 65.2 76.5 72.5 73.9 Pre-Tax Profit $m 141.7 146.5 156.4 161.9 Tax Expense $m 18.2 23.2 20.7 21.7 Tax Expense $m 41.4 42.5 45.3 47.0 Net Profit $m 46.9 53.3 51.8 52.2 Net Profit $m 100.2 104.0 111.0 115.0 Outside equity interests $m 1.9 4.1 3.6 3.6 Outside equity interests $m 6.0 7.2 7.2 7.2 Net Abn/Extra $m 0.0-6.1 0.0 0.0 Net Abnormals/Extra. $m -6.1 0.0 0.0 0.0 Reported Earnings $m 45.0 43.1 48.2 48.6 Reported Earnings $m 88.1 96.8 103.8 107.7 Adjusted Earnings $m 45.0 49.2 48.2 48.6 Adjusted Earnings $m 94.2 96.8 103.8 107.7 Gross Cashflow $m 64.8 78.1 74.3 74.1 Gross Cashflow $m 142.9 148.3 160.2 167.4 EPS (Adj/dil) c 14.7 16.0 15.7 15.8 EPS (adj/diluted) c 30.7 31.6 33.9 35.1 EPS growth % -0.2 12.3 7.0-1.3 EPS growth % 0.1 2.7% 7.3% 3.8% CFPS c 21.7 15.3 5.0 31.8 PE (adj) x 12.2 11.9 11.1 10.7 CFPS Growth % 121.6-43.9-76.8 107.6 CFPS c 37.0 36.8 49.5 46.3 EBITDA/Sales % 4.0 4.2 4.0 4.0 CFPS Growth % -2.0-0.5 34.6-6.5 EBIT/Sales % 3.2 3.5 3.2 3.3 PGCFPS x 10.2 10.2 7.6 8.1 Earnings Split % 47.8 52.2 49.8 50.2 DPS c 22.0 22.5 24.0 24.0 Revenue Growth % 10.8 10.7 7.2 5.3 Yield % 5.9 6.0 6.4 6.4 EBIT Growth % 13.9 22.3 7.9-0.8 Franking % 100.0 100.0 100.0 100.0 Profit and Loss ratios 2015A 2016E 2017E 2018E Cashflow Analysis 2015A 2016E 2017E 2018E Revenue Growth % 10.8 6.2 4.2 2.9 EBIT Growth % 18.2 3.3 6.0 3.1 Pre-tax Profit $m 141.7 146.5 156.4 161.9 EBITDA/Sales % 4.1 4.0 4.1 4.2 Depreciation & Amortisation $m 40.5 43.3 46.3 50.8 EBIT/Sales % 3.3 3.3 3.3 3.3 Tax Paid $m -39.3-41.4-42.5-45.3 Effective tax rate % 29.2 29.0 29.0 29.0 Gross cashflow $m 142.9 148.3 160.2 167.4 Payout ratio % 71.6 71.3 70.9 68.3 Changes in working capital $m -53.9-34.6-5.6-24.0 EV/EBITA x 11.2 11.1 10.5 10.3 Other $m 24.4-1.1-2.9-1.6 EV/EBITDA x 9.1 8.9 8.4 8.2 Operating Cashflow $m 113.3 112.7 151.7 141.8 EV/Sales x 0.4 0.4 0.3 0.3 Acquisitions $m -75.0-69.0 0.0 0.0 Capex - Plant & Equip. $m -98.4-100.0-84.2-86.7 Balance sheet ratios Asset Sales $m 17.1 45.2 0.0 0.0 ROE % 14.2 14.1 14.5 14.4 Other $m 0.6 40.2 0.0 0.0 ROA % 9.4 9.1 9.4 9.5 Investing cashflow $m -155.7-83.6-84.2-86.7 ROFE % 12.4 11.9 12.2 12.2 Dividend (ordinary) $m -71.1-69.0-73.6-73.6 Net Debt $m 813.1 852.9 859.0 877.5 Equity raised $m 0.0 0.0 0.0 0.0 Net Debt/Equity % 116.9 116.7 111.8 108.4 Other $m 0.0 0.0 0.0 0.0 Interest Cover x 5.2 5.2 5.4 5.5 Financing cashflow $m -71.1-69.0-73.6-73.6 Price/NTA x 4.1 3.7 3.4 3.1 NTA per share $ 0.91 1.01 1.10 1.22 Net Change in cash/debt $m -113.5-39.8-6.1-18.4 EFPOWA m 306.5 306.5 306.5 306.5 Historical performance 2012A 2013A 2014A 2015A Balance Sheet 2015A 2016E 2017E 2018E Cash $m 69.9 55.0 48.9 30.5 Revenue $m 3914.7 4277.6 4732.2 5242.8 Receivables $m 318.6 296.6 309.2 318.2 EBITDA $m 153.5 165.3 178.6 215.8 Inventories $m 732.0 777.4 781.4 804.2 Depreciation/Amortisation $m 26.5 28.4 30.4 40.5 Investments $m 7.4 36.2 36.2 36.2 EBIT $m 127.0 137.0 148.3 175.2 Property, plant & equipment $m 349.2 360.7 398.6 434.5 Net interest expense $m 30.7 29.4 30.7 33.6 Intangibles $m 392.0 392.0 392.0 392.0 Pre-Tax Profit $m 96.3 107.6 117.5 141.7 Other Assets $m 88.0 88.0 88.0 88.0 Tax Expense $m 29.2 31.7 35.7 41.4 Total Assets $m 1957.1 2005.9 2054.3 2103.6 Net Profit $m 67.1 75.9 81.9 100.2 Payables $m 269.0 257.8 268.7 276.6 Net Abn/Extra $m -13.5-6.0-5.6-6.1 Short Term Debt $m 616.5 616.5 616.5 616.5 Long Term Debt $m 266.5 291.5 291.5 291.5 EPS (adj/dil) c 24.7 27.9 29.0 30.7 Other Liabilities $m 109.5 109.5 109.5 109.5 EPS growth % 0.1 0.1 0.0 0.1 Total Liabilities $m 1261.4 1275.3 1286.2 1294.1 Ordinary DPS c 18.0 20.0 21.0 22.0 Shareholders Funds $m 672.3 700.1 730.3 764.5 EBITDA/Sales % 3.9 3.9 3.8 4.1 Minority Interests $m 23.3 30.5 37.8 45.0 EBIT/Sales % 3.2 3.2 3.1 3.3 Total Shareholders Equity $m 695.6 730.7 768.1 809.5 ROE % 14.2 15.6 13.9 14.2 ROFE % 13.8 12.6 11.9 12.4 Total Funds employed $m 1,957.1 2,005.9 2,054.3 2,103.6 EFPOWA m 259.7 260.7 270.9 306.5 2015A 2016E 2017E 2018E Divisional Information 2015A 2016E 2017E 2018E Fixed charges cover Automotive Revenue 4,269.07 4,664.83 4,917.35 5,102.05 EBITDA 215.8 224.3 238.1 248.6 Growth 0.1 4.0% 4.0% 4.0% EBIT 175.2 181.0 191.8 197.8 Op lease payments 64.7 68.7 71.7 73.7 EBIT 142.2 158.5 164.7 170.9 Net Interest 33.6 34.5 35.4 35.8 Margin 3.4% 3.4% 3.4% 3.4% Fixed charges cover: Logistics EBITDA 2.9 2.8 2.9 2.9 Revenue 973.8 903.2 886.9 871.5 EBIT 2.4 2.4 2.5 2.5 Growth 0.1-7.2% -1.8% -1.7% ND/EBITDA 3.8 3.8 3.6 3.5 EBIT 33.1 22.5 27.1 26.9 Margin 3.4% 2.5% 3.1% 3.1% Source: Company data, Macquarie Research, June 2016 29 June 2016 14
Fig 24 Appendix 1 Summary Autonation (AN.US) historical financials (USD) Revenue CY13 CY14 CY15 New 9,949.6 10,972.2 11,995.0 Used 4,127.4 4,385.7 4,768.7 F&I 674.0 750.8 868.7 Parts and Service 2,597.4 2,822.5 3,082.8 Other 169.2 177.6 146.8 Total 17,517.6 19,108.8 20,862.0 Domestic 5,835.3 6,359.5 7,069.8 Import 6,375.0 6,717.8 7,037.2 Luxury 5,152.3 5,889.3 6,607.8 Other 155.0 142.2 147.2 Total 17,517.6 19,108.8 20,862.0 Units Domestic 96,229.0 102,643.0 111,519.0 Import 143,325.0 154,066.0 157,868.0 Luxury 53,368.0 61,299.0 69,693.0 Total New 292,922.0 318,008.0 339,080.0 Used 204,572.0 214,910.0 227,290.0 Total 497,494.0 532,918.0 566,370.0 Revenue per unit New 33,967 34,503 35,375 Used 20,176 20,407 20,981 Gross profit New 616.4 650.1 673.1 Used 329.7 360.6 353.7 F&I 674.0 750.8 868.7 Parts and Service 1,105.8 1,196.6 1,338.0 Other 34.0 30.6 28.0 Total 2,759.9 2,988.7 3,261.5 Gross profit % New 6.2% 5.9% 5.6% Used 8.0% 8.2% 7.4% F&I 100.0% 100.0% 100.0% Parts and Service 42.6% 42.4% 43.4% Other 20.1% 17.2% 19.1% Total 15.8% 15.6% 15.6% Gross profit per vehicle New 2,104 2,044 1,985 Used 1,612 1,678 1,556 F&I 1,355 1,409 1,534 Total excl parts 3,257 3,305 3,347 SG&A 1,935.0 2,079.6 2,263.5 SG&A/sales 11.0% 10.9% 10.8% EBITDA 824.9 909.1 998.0 Margin 4.7% 4.8% 4.8% Source: Company data, Autonation, June 2016 29 June 2016 15
Fig 25 Appendix 2 Summary Penske (PAG.US) historical financials (USD) Revenue CY13 CY14 CY15 New 7,528.2 8,698.8 9,208.9 Used 4,201.3 4,971.1 5,425.5 F&I 370.4 436.0 478.3 Parts and Service 1,531.7 1,716.9 1,830.7 Other 698.3 834.7 952.9 Total 14,329.9 16,657.5 17,896.3 Units New 195,566.0 216,609.0 233,524.0 Used 163,356.0 182,109.0 198,459.0 Total 358,922.0 398,718.0 431,983.0 Revenue per unit New 38,494 40,159 39,434 Used 25,719 27,297 27,338 Gross profit New 580.7 674.6 706.9 Used 307.0 335.5 328.3 F&I 370.4 436.0 478.3 Parts and Service 908.3 1,021.6 1,084.0 Other 10.4 9.7 10.5 Total 2,176.8 2,477.4 2,608.0 Gross profit % New 7.7% 7.8% 7.7% Used 7.3% 6.7% 6.1% F&I 100.0% 100.0% 100.0% Parts and Service 59.3% 59.5% 59.2% Other 1.5% 1.2% 1.1% Total 15.2% 14.9% 14.6% Gross profit per vehicle New 2,969 3,114 3,027 Used 1,879 1,842 1,654 F&I 1,032 1,094 1,107 Total excl parts 3,505 3,627 3,504 SG&A 1,692.4 1,928.2 2,018.2 SG&A/sales 11.8% 11.6% 11.3% EBITDA 484.4 549.2 589.8 Margin 3.4% 3.3% 3.3% Source: Company data, Penske, June 2016 29 June 2016 16
Fig 26 Appendix 3 Summary Lithia (LAD.US) historical financials (USD) Revenue CY13 CY14 CY15 New 2,256.6 3,077.7 4,552.3 Used 1,190.5 1,558.2 2,188.6 F&I 139.0 190.4 283.0 Parts and Service 383.5 512.1 739.0 Other 36.2 52.0 101.4 Total 4,005.7 5,390.3 7,864.3 Units New 66,857.0 91,104.0 137,486.0 Used 79,147.0 99,592.0 137,276.0 Total 146,004.0 190,696.0 274,762.0 Revenue per unit New 33,753 33,782 33,111 Used 15,041 15,646 15,943 Gross profit New 151.1 198.2 280.4 Used 153.6 182.9 245.7 F&I 139.0 190.4 283.0 Parts and Service 185.6 249.7 363.9 Other 1.7 2.1 2.6 Total 631.0 823.3 1,175.6 Gross profit % New 6.7% 6.4% 6.2% Used 12.9% 11.7% 11.2% F&I 100.0% 100.0% 100.0% Parts and Service 48.4% 48.8% 49.2% Other 4.7% 4.1% 2.6% Total 15.8% 15.3% 14.9% Gross profit per vehicle New 2,260 2,175 2,039 Used 1,940 1,836 1,790 F&I 952 998 1,030 Total excl parts 3,039 2,997 2,945 SG&A 427.4 563.2 811.2 SG&A/sales 10.7% 10.4% 10.3% EBITDA 203.6 260.1 364.5 Margin 5.1% 4.8% 4.6% Source: Company data, Lithia, June 2016 29 June 2016 17
Fundamentals Macquarie Wealth Management Macquarie Quant View The quant model currently holds a neutral view on Automotive Holdings Group. The strongest style exposure is Quality, indicating this stock is likely to have a superior and more stable underlying earnings stream. The weakest style exposure is Profitability, indicating this stock is not efficiently converting investments to earnings; proxied by ratios like ROE or ROA. 297/470 Global rank in Retailing % of BUY recommendations 30% (3/10) Number of Price Target downgrades 0 Number of Price Target upgrades 0 Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Retailing) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. Corporate Travel Manageme 1.3 Corporate Travel Manageme Invocare 0.6 Invocare Myer 0.2 Myer Seven West Media Ardent Leisure Group Village Roadshow 0.0-0.2-0.4-0.4 Seven West Media Ardent Leisure Group Village Roadshow -3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. Corporate Travel Manageme Invocare Myer Seven West Media Ardent Leisure Group Village Roadshow 0.2 0.1-0.9-0.8 0.6 0.8 1.1 Corporate Travel Manageme Invocare Myer Seven West Media Ardent Leisure Group Village Roadshow -3.0-2.0-1.0 0.0 1.0 2.0 3.0-40% -30% -20% -10% 0% 10% 20% 30% 40% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Dividend Yield LTM Price to Cash LTM EV/EBITDA (NTM) EV/EBITDA LTM RNOA ROIC FY0 Net Income Margin FY0 Return on Assets FY0-25% -25% -26% -27% Negatives Positives -30% -20% -10% 0% 10% 20% 30% 26% 25% 25% 25% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score -0.02 0.09 0.05-0.22-0.15-0.20 0.74 0.08-1.43-0.03-0.17 Percentile relative to sector(/470) Percentile relative to market(/398) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 29 June 2016 18
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 2016 AU/NZ Asia RSA USA CA EUR Outperform 50.34% 59.09% 46.67% 44.76% 60.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients) Neutral 34.14% 25.66% 32.00% 49.90% 30.33% 35.10% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients) Underperform 15.52% 15.26% 21.33% 5.33% 9.02% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients) AHG AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 2016 12-month target price methodology AHG AU: A$4.36 based on a EV/EBITA methodology Company-specific disclosures: AHG AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Automotive Group Holdings Ltd's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. Date Stock Code (BBG code) Recommendation Target Price 19-Feb-2016 AHG AU Outperform A$4.57 14-Aug-2015 AHG AU Outperform A$4.58 21-Jul-2015 AHG AU Outperform A$4.61 06-Jul-2015 AHG AU Outperform A$4.60 13-Feb-2015 AHG AU Outperform A$4.34 14-Nov-2014 AHG AU Outperform A$4.39 15-Aug-2014 AHG AU Outperform A$4.24 25-Mar-2014 AHG AU Outperform A$4.45 14-Feb-2014 AHG AU Outperform A$4.29 19-Aug-2013 AHG AU Outperform A$4.25 02-Jul-2013 AHG AU Outperform A$3.73 Target price risk disclosures: AHG AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views 29 June 2016 19
expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Wealth Management, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures Macquarie Group 29 June 2016 20