RPM Automotive’s (ASX: RPM) tyre industry roll-up is on a roll

Behzad Golmohammadi Behzad Golmohammadi, November 25, 2022

RPM Automotive Group (ASX: RPM) provides automotive aftermarket services in Australia. It sells tyres, motorsport apparel and safety equipment. It also offers mechanical repairs and roadside assistance services for the transport industry.  

 

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RPM Automotive’s revenue has grown exponentially in the last 4 years, from $0 in FY19 to $78m in FY22 and it has been profitable since FY21, and made $2.6m of profits in FY22. But the bear market has taken down RPM’s share price to lows of around 20 cents where the stock’s chart suggests a bottom for the share price has been found. 

 

RPM Automotive

RPM Automotive, Daily Chart in Semi-log Scale (Source: Metastock)

 

A roll-up of tyre businesses 

RPM Automotive’s rapid revenue growth was the result of its multiple vertical acquisitions in the automotive aftermarket parts sector with a focus on tyre businesses. Since 2019, it has acquired several small Australian wholesale and retail of tyre businesses through a combination of cash and shares considerations.  

 

Fast-growing and profitable 

FY21 and FY22 results showed that RPM Automotive’s vertically integrated business model works very well for the company. The cross-selling between its importer and distributor subsidiaries led to massive revenue growth, which was accompanied by cost efficiencies as economies of scale kicked in and helped improve its profit margins. 

 

Demand for tyres in Australia to grow for the foreseeable future 

The tyre retailing industry was impacted by the COVID-19 travel restrictions and stay-at-home orders in FY21 and FY22. But with the pandemic behind us, road travel in the country is expected to continue to increase in line with its pre-pandemic growth rates in the years ahead. 

According to Statista, the number of vehicles on Australian roads kept increasing even during the pandemic, reaching over 20 million registered vehicles by the end of 2021, representing an annual growth rate of 1.8% since 1995. 

The market size of the tyre retailing industry in Australia is estimated to be $5 billion with more than 3,000 businesses operating in the sector, leaving plenty of room for RPM Automotive’s organic and inorganic growth. 

 

FY23 is going to be another year of astronomic growth for RPM Automotive 

RPM Automotive recorded revenue of $28m in 1Q23, up 89% year-on-year, with an EBITDA of $2.6m for the quarter, which was up 179% year-over-year and showed significant EBITDA margin expansion. 

RPM Automotive’s chairman’s address at the company’s annual general meeting on 24 November also mentioned the company is on track towards $60m of revenue for 1HY23, representing 65% growth on the prior corresponding period.  

 

Attractive valuation 

Assuming similar revenue of $60m for 2HY23, the revenue for the entire FY23 would be $120m. Even using the company’s FY22 EBITDA margin of 6.8%, we can expect an EBITDA in excess of $8m for FY23, implying an EV/EBITDA multiple of 7.5x for this year. Not bad for a fast-growing small-cap company. 

 

Economic uncertainty can dampen demand for new tyres 

The current economic uncertainty can encourage consumers to look for lower-cost tyres and extend tyre replacement cycles. In addition, lower consumer confidence can cause drivers to drive fewer kilometres to minimise running costs, which would also reduce demand for new tyres.  

Therefore, an economic downturn will adversely impact RMP Automotive’s revenue and margins, which would obviously be detrimental to RPM’s share price. 

 

How to play RPM Automotive’s stock 

RPM’s share price seems to have found a bottom around 20 cents, indicated by range trading and very low trading volumes. As the company’s revenue and profits are expected to continue to grow at a high rate, we expect its share price to reflect the improving financial performance, it should recover some of the declines from the high of 47 cents in April 2021. 

As such we think prices near 20 cents are attractive with target prices of 25, 30 and 35 cents at Fibonacci retracement levels of 23%, 38% and 50%, respectively. 

 

Stop loss of 18.5 cents

We recommend using the support level of 18.5 cents as a stop loss level (the blue line on the chart). A confirmed break below this level would indicate a significant bearish sentiment on the stock that can open the way down to lower levels. 

 

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RPM Automotive’s (ASX: RPM) tyre industry roll-up is on a roll 1

 

 

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