Potential merger with Hedin
In January 2020, the much larger Swedish group Hedin Automotive and Stern announced merger talks. After several divestments over the last year by Stern, a merger with Hedin would be a decisive step to become one of the European leaders in automotive retail. The combined group would have a turnover of roughly €3.5bn and, given Hedin's aggressive acquisition strategy, we would expect it to have ambitious further growth plans. With that, the combined entity could become a top five European automotive dealer. Details of the potential transaction are not available yet, but the way that Stern is valued in the combination will be key for shareholders. The enlarged group would certainly lead to a higher liquidity of the shares on Euronext.
The combination, through a reverse takeover, intends to retain and use the Euronext Amsterdam listing as a platform for further growth. In March after COVID-19 hit, the merger talks were suspended, but the talks have been resumed. Important conditions like the proposed exchange ratio have not been disclosed. The combination of Stern and Hedin Automotive would be complementary in terms of geographic focus with strong positions in the Netherlands, Norway, Sweden, Switzerland and Belgium, and also in represented car brands (it would add BMW and Porsche for instance). By forming a large combination with leading positions, especially in smaller countries, Hedin and Stern would be better positioned to play into the numerous trends and developments that are shaking up the automotive retailer world. One of these is the ongoing globalisation of the automotive market.
The management board currently only consists of CEO Van der Kwast. We believe that the financial director, Mr Finus Porsius, who has been in this position at Stern Groep for many years now, is as close to a CFO as can be.
After a career in banking and corporate finance, Mr van der Kwast became an entrepreneur in 1993, when he acquired loss-making Opel dealership Riva. In the following years, the former rower (he participated in a number of world championships) gradually built out into a leading nationwide multi brand dealership and got access to the stock exchange through a reverse takeover of AIR (Auto Industrie Rotterdam) in 2000. He still is a major shareholder with a >12% stake.
Stern Groep is effectively led by Mr van der Kwast, advised by the 12-person strong Group Council. The council consists of the company’s CEO (who is a chairman of the council), Mr Porsius, all the car franchise heads (five, ranging from Mercedes to Ford), the product group heads (Mobility Solutions and Stern Point) and group functions (HR, corporate affairs, controlling).
Although we believe that Stern is effectively led, a more balanced management board would be a positive in terms of corporate governance.
Exhibit 6: Management and supervisory board
Mr Henk van de Kwast |
CEO of the management board |
Mr B Goeminne |
Chairman of the supervisory board |
Mrs MEP Sanders |
Supervisory board member |
Mr P Nielen |
Supervisory board member |
COVID-19 adding to an already disrupted environment
The car dealership business is already undergoing major disruption from established trends like the move to cleaner fuels (electrification) and a tendency to lower car ownership by leasing or shared car concepts. COVID-19 just exacerbated the already harsh market environment, resulting in a collapse of new car sales, lower utilisation of the rental fleet and decreasing workshop revenues, although interestingly used car sales were comparatively robust. Many car dealerships in the Netherlands, Stern included, have made use of the Dutch government support programs for companies suffering a >20% revenue collapse after COVID-19 and with a robust balance sheet and stringent cost cutting, Stern continues to proactively manage cash flow.
EVs and other attitudes to car ownership
COVID-19 has had a profound impact on the Dutch car market, which was already going through disruptive changes:
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New car sales collapsed: Over the first six months of the year, new passenger car registrations fell by 30% to 158,150, mostly driven by lower consumer confidence caused by COVID-19. For the full year, sector organisations Bovag and Aumacon expect a 22% decrease to 350,000 new passenger car sales and Aumacon expects a rebound to 415,000 new passenger cars by 2021 (Exhibit 7).
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Rental services and Maintenance were hit severely by the lower mobility needs driven by working at home and less business travel due to COVID-19.
Longer-term trends affecting the car market include:
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The way people buy new and used cars continues to shift towards primarily online identification and specification with dealership visits becoming rarer and shorter.
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There is a continuing transition to EVs, which will most likely reshape the current automotive landscape in the medium to long term. EVs require much less maintenance, which is the current profit driver of dealerships.
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New generations care less about car ownership. In particular, private leases have become popular in the Netherlands. Leases lead to margin pressure due to the better bargaining position of lease companies compared to individuals, and shared car concepts lead to market pressure as fewer cars are needed when they are shared.
Exhibit 7: New passenger car sales in the Netherlands
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Source: CBS, Aumacon, Bovag
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New and used car sales
New and used car sales are mostly driven by consumer confidence for large purchases, as measured by the Dutch statistics office Centraal Bureau voor de Statistiek (CBS, see graph below). Consumer confidence collapsed on the back of COVID-19, which has resulted in much lower new car sales. On top of that, people started working from home on a large scale, however this effect was partly mitigated by people not being willing to use public transport and therefore switching to cars.
In the first six months of 2020, only one brand reported growth and that was Kia, with its success model the Kia Niro, available in (plug-in) hybrid or EV cross over. For Stern, sales of the important brands such as Mercedes (-27%), Renault (-30%) and Ford (-33%) fell significantly.
On the other hand, the used car market was much more resilient in H120, with sales falling only 1.6% in the first six months to 664,000, according to sector data supplier VWE. In June, the number of used car sales actually increased by 15.5% y-o-y, as consumers looked for alternatives to public transport. However, it is currently unclear if this is a sustainable longer-term trend.
Exhibit 8: Consumer confidence and growth in new car sales
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Source: CBS, Bovag, Aumacon
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Rental market
The utilisation of the rental car fleet diminished as well, as mobility decreased in the Netherlands. Up to 50% declines in revenues have been seen in the Dutch rental sector according to sector organisation Bovag. Unlike pure car rental companies such as Hertz, which filed for bankruptcy, Stern can be much more flexible and it has been able to reduce its rental fleet to 1,916 cars by the end of Q2 from 2,574 at the start of the year. Maintenance was also hit due to a lower utilisation of staff, as disease rates were higher.
Electric car market
Internal combustion engines fuelled by gasoline or diesel will probably reach the end of their lives in the coming decades, now that the economics of electric powered cars are getting more attractive every year, in a society that in general is becoming more focused on environmentally friendly energy solutions. The Dutch government started to incentivise EVs after the pandemic was declared, with large subsidies (€4,000 for a new car and €2,000 for a used car) and Stern has limited exposure to fully electrical powered cars. In the top selling ranks, electrical and hybrid car models are being introduced and that will have a gradual impact on all segments of the value chain, from a changing dealer landscape to parts selling to maintenance, as EVs require different service for power units and batteries as well as running gear wear parts.
Despite the momentum and noise around these new developments, EV/hybrid car penetration in the Netherlands is still relatively low, at only 222,102 according to Nederlandelectrisch.nl compared a total fleet of roughly 8.7m passenger cars (CBS.nl), or only 2.6%.
Exhibit 9: EV and Hybrid fleet development in the Netherlands
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Source: nederlandelectrisch.nl
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Lease and car sharing
In a world in which car ownership is becoming less important, especially for the younger population, car sharing concepts and leased cars are getting more popular. Leases already account for over 60% of all new car sales in the Netherlands and margins on lease cars for dealerships are typically lower, as lease companies are able to negotiate large discounts. At the same time, servicing lease cars can be more attractive and that is why having a national coverage network is so important. From the total leased car fleet in the Netherlands of around 1m cars, according to lease company sector organisation Vereniging van Nederlandse Autoleasemaatschappijen (VNA) (of a total passenger car fleet of 8.7m and 915k light commercial vehicles according to CBS), 68% are company leased passenger cars, 15% private leased company cars and 17% light commercial vehicles. While corporate leases have always been dominant in the lease market, private leases are growing fast (see Exhibit 12), driven by low interest rates, which result in the attractive rates that are offered. Lease contracts are based on a fixed duration, a maximum number of kilometres a year and include service at predefined service stations, taxes and insurance and can include fuel as well.
We see car sharing as the smallest of the trends mentioned, as it will be probably more limited to the more urban areas, where availability of shared cars is much higher. Nevertheless, new car buyers are getting older, as younger generations do not really attach value to owning a car and are happy to make use of car share concepts like Car2Go, Greenwheels or even the neighbour’s car (SnappCar).
Exhibit 10: Development of the private lease fleet in the Netherlands
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Source: VNA-Lease, ING estimate
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H120 results: Weathering the storm
2020 has become an especially challenging year for car dealerships in the Netherlands. Overall, the Dutch new passenger car market showed a decrease of 30% to 158,000 units in H120 compared to H119, while the light commercial vehicle segment recorded a 31% drop in sales to 30,000. On the other hand, used passenger car sales only declined 1.6% to 664,000 vehicles but ended the half year on a much more positive note with a rise of 15.5% to more than 126,000 in June. For the full year, the new passenger car market is expected to decline 21.5% to 350,000 vehicles, according to sector organisations Aumacon and RAI, which implies a year-on-year decrease of 20% in H220.
In these difficult market conditions, Stern surprised positively with an estimated c 19% decrease in new passenger car sales and 33% lower light commercial vehicle sales, despite a dealer network that has closed 10 branches in H219. Nevertheless, the impact from COVID-19 was still very pronounced. All in all, overall revenues declined 12.5% to €382m in H120.
To weather this operational storm, Stern made use of the subsidies the Dutch government supplied for companies with >20% sales impact from COVID-19 under the so-called NOW legislation, which lasts up to October 2020. In total almost €4.9m was provided to Stern, mostly in its Mercedes and Ford dealerships. The government facilities for the later payment of VAT and income tax on wages were also used.
As a result of the use of the government support, operational cash flow has been strong at €46m in H120 (compared to €4.6m in H119). Part of this will reverse in H220 when postponed taxes, of which €29.2m was outstanding at H120, will have to be paid. This is something we see at many Dutch companies.
Maintenance revenues in the Dealergroup segment were lower in H120 as a result of 5% lower staff numbers compared to H119 and COVID-19 related health implications on staff. Nevertheless, efficiency of the workshops, measured in billable hours per available employee, was better and also higher rates for mechanics helped to smooth the decrease. In all, EBIT for the Dealergroup business decreased to €2.6m (excluding goodwill impairment) compared to €5.8m in H119, which we believe is a very strong performance given the top-line decrease.
Mobility Services, mostly rental business, counterintuitively had higher revenues in H1, due to remarketing of cars removed from the rental fleet (from 2,574 at end 2019 to 1,916 at the end of June 2020) being sold within the car dealerships, which offset the large decline in rental activities. As a result of the decline in rent activity, the division reported an EBIT loss of €0.7m compared to a small profit in H119.
The Car Services segment posted 11% lower revenues in H120 and a negative EBIT of €0.4m on the back of the lower car body repair works during the coronavirus outbreak.
At the consolidated level, EBIT from continued activities came in at €4.0m, compared to €4.8m in H119, which we believe is an impressive performance given the market environment, albeit achieved with the government support. In addition, this result was somewhat distorted by a one-off benefit on the revaluation of the 5% stake in car insurer Bovemij of around €4m to €18.5m we expect, partly offset by restructuring costs. In the first six months Stern reduced its staff by 77 from 1,858 full-time equivalent employees at year end 2019.
Stern took an impairment of €20m for all the dealer related goodwill on the balance sheet and also wrote down €1m on used cars. This resulted in Stern posting its biggest reported half year loss of €19m in H120. In the 2019 annual report Stern had mentioned that the headroom in testing the value of goodwill was already limited. The current situation has prompted management to impair goodwill based on more conservative assumptions (a higher WACC and lower results), making the balance sheet more transparent and realistic.