Cobas AM: Nueva Gestora de Francisco García Paramés

 AMA Group Ltd. is the largest vehicle panel repair business in Australia and New Zealand. With trailing 12-month sales of A$926M, it represents nearly 13% to 15% market share of the industry’s total revenues at their estimate of A$6B to A$7B annually. AMA is a roll-up, consolidating a fragmented industry, and it appears to be following the template of Boyd Group Services (BYD CN, C$213), a Canadian company that has been very successful rolling up that industry in Canada and the U.S., generating a 42% CAGR total return for its shareholders over the 10 years ending 12/31/2020. AMA also performed well as the table below shows how its sales, EBITDA, FCF, and dividends have grown over the past 10 years. 

 Organic growth is slow, as miles driven is the main factor for the number of collisions, but we believe that will rebound strongly from COVID-19 as more people drive to take long overdue vacations and to commute to work. Collision avoidance technology is a long-term headwind, but has had only a minor effect thus far, offset by more technology in each automobile yielding more expensive bills per repair. 90% of AMA’s revenues are paid by auto insurance companies, its maintenance cap-ex is low, and free cash flow conversion is high. Large players like AMA benefit from scale in that they can better afford new equipment needed to service higher tech content in cars and secure better terms from suppliers (like AMA’s 10- year deal with BASF for paint) and payers (insurers recently agreed to pay AMA more for more complex repairs). The industry remains highly fragmented, so buying smaller operators (unwilling to spend on new equipment for more complex repairs, roughly A$100,000 investment per shop) at 3.5x EBITDA where that EBITDA becomes worth 10x as part of the larger entity is a path to continued growth that they have yet to fully exploit. On 1/31/21 AMA announced the termination of its CEO, Andrew Hopkins (Exec. Director since 2015 when his former firm was acquired), claiming he charged excessive unapproved expenses, seeks A$1M. They named director Carl Bizon as CEO. AMA stock fell on the news and we started buying shares in the days that followed. Our purchases have continued such that Mittleman Brothers is the 3rd largest shareholder as of the date of this letter with just over a 7.1% stake in AMA. Our A$1.15 fair value estimate of AMA is derived as follows: A$1.15 = 10x EBITDAaL (est. for FY2022) of A$100M = A$1B minus net debt of A$150M (as of 12/31/20) = A$850M equity / 742M shares. Equity value = 17x FCF est. of A$50M. While public comps are limited, with the aforementioned Boyd Group in Canada being the closest comparable and trading at 13x EBITDA est. for 2022, there are some auto retailers in Australia like Eagers Auto (APE AU, A$16.80) which is valued at 15x EBITDA est. for 2022 despite having substantially lower EBITDA margin vs. AMA, and we’ve seen auto retailers buying body shops in other countries so that’s relevant. There is also Driven Brands Holdings (DRVN $25.42) in the U.S. which is not a pure play (they own car washes and other auto service businesses, not just collision repair) and enjoys a much higher EBITDA margin because its largely a franchised operation (maybe something AMA can consider) so it does have a much higher EBITDA multiple of 20x, so less comparable to AMA today, but something to aspire to, maybe