ALD Automotive - Financial Statements
Description
ALD Automotive is the largest independent lessor of cars in Europe after the recent acquisition of the Dutch LeasePlan. They promise shareholders a ~10% dividend yield at a 50% payout, together with 6% annual fleet growth. This hits my mental hurdle of 15% annual return and for that reason I believe it is a good place to park some cash in an environment in which many shares have run ahead of their still lingering fundamentals. Other than the limited free float, the opportunity exists because car lessors are currently overearning due to historically strong residual values. Income from Used Car Sales has been elevated since 2021. To complicate things further, ALD changed their depreciation assumptions for their existing fleet from Q2 2022, because carrying values were already at or below fair value. This means that the excess earnings temporarily move from Used Car Sales to Leasing Contract Margin. Disclosure from ALD on this aspect is sufficient to calculate normalized earnings. Unfortunately the same cannot be said for Leaseplan, so my calculation of normalized earnings is embarrassingly inaccurate. At closing, the CET1 ratio is expected to be 12% which warrants a rating upgrade from BBB to A- by Fitch and S&P. Funding is diverse and consists of Société Generale funding, deposits, bonds/loans and securitization. Liabilities roughly match the short duration of their lease book (average ~2 years). The rising interest rates have so far been more than offset by rising lease rates. The big question is whether this will change when residual values have normalized. If elevated RVs are the result of a supply / demand imbalance, we either need a supply catchup, which might take a few years given we still need to catch up on 2 years of undersupply. A demand slowdown is of course in the cards as demand correlates with European economic activity. European politicians have been working hard for the last 20 years to slow down their economy in every way imaginable. So in short, EPS will normalize from the 2.75 EUR that ALD earned in 2022 as a stand-alone entity. This normalization will probably take 2-3 years to work out. In return we get a bunch of synergies coming in over the next 3 years. My inaccurate model tells me we end up at a ~5-6x P/E, with a high-teens ROE. That’s enough to afford a 10% dividend and 6% fleet growth and still leave some change to fund vanity projects or to deleverage. I believe the 10% dividend is sustainable and therefore provides some downside protection in case we all freak out like it's 2022 and stocks go down. The main risk I see is that the inflationary environment makes the C/I ratio worse than targeted. This is probably the part of the math that I have the least confidence in. Residual values also need to be watched. Europe does not have an equivalent to the Manheim index, so this is a little harder to track, but for 2023 RVs continue to be strong.