"Fully agree with your assessment that the Dunlop deal will be a significant contributor to the business, but what are you seeing that points towards a cyclical inflection point?Input costs (oil) still highly elevated so I'm assuming that their suppliers are struggling with costs (so unlikely to be able to get reductions on that front), and FX rate in 1H24 may end up worse than the average in FY23 which all points towards a challenge to maintain those margins."@SteveSage,
Of the two factors you lists, namely oil price and exchange rate, I recently learnt - from someone who posed the question to NTD's CEO - that the company's observations are that fuel prices matter more than the exchange rate.
I guess the respective economics work something like this:
Exchange Rate:When the exchange rate moves against distributors, there is an initial period of GP Margin pain, but then the industry responds after a period of time with the price adjustments required in order to protect viability. But in such a situation, total km driven remains largely unchanged, and so volumes remain relatively intact (as you know, volume is a critical parameter for fixed cost distribution businesses).
Oil price (hence petrol and diesel prices):
When fuel prices rise, this acts as a deterrent to driving, so volumes leak out of the system, which reduces the ability to fractionalise fixed cost overheads.
So I don't stress too much around what the exchange rate is doing at any given point in time, because all the distributors are in the same basket and "water soon finds its level again" when it comes to industry pricing dynamics.
But sufficiently high prices at the bowser (or rather, sharp movements in price, more than their absolute level) is a negative factor that is more significant.
As for what I am seeing that points to having passed the inflection point in the cycle, well in DH2022 the company made no money (DH2022 EBIT Margin was just 1.2%) and in the past half the EBIT Margin was a mere 3.7%.
These levels are best viewed in the context of NTD's history (along with, for what they are worth, my forecasts for the current financial half-years):
View attachment 5672026As can be seen, NTD's average EBIT Margin is around 6.5%; the past 24 months have been well down on the norm.
And if NTD, the largest independent distributor in the country, is experiencing that kind of margin discomfort, then you know the rest of the industry is in a world of pain, with precious little wiggle room on product price lists, lest they risk going teets-up.
Sure, DH2023 is unlikely to be a >6% margin half; heck it will not even come in at 5%. But I'm dead certain it will be an improvement on the pcp's 1.2% figure.
So the period-on-period delta will be large (another way of saying the base is very small), and you know how the market invariably responds to those kinds of "big delta" optics.
So that's the basis for my feeling that the worst of the cycle is behind the company.
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(20min delay)