Ann: Change in substantial holding, page-13

Agree on the roll-up story - the CEO has grown the business from a single site to 27 - so growth by acquisition is a fundamental part of the strategy and indeed of the appeal of MTO. But when we can't assess how attractive the acquisitions are, it makes it hard to invest IMHO.

I had a quick review of the prospectus. It identified but did not quantify some of the advantages of scale. Eg, the prospectus highlights that there are benefits from "increased scale including improved terms from suppliers as a result of volume discounts". I have no idea how significant those are, however. But isn't that thesis partly undermined by the large number of bike brands that MTO owns (and therefore I assume suppliers they negotiate discounts with)? If the discounts were really significant wouldn't you concentrate on a limited number of marques so as to maximise the discounts? The prospectus also mentions opportunities to increase the "penetration of finance and insurance products associated with motorcycle sales". Those might offer higher margins than the selling activities - but none of commissions revenue (not parts nor service revenue) grew faster than bike selling revenues in FY16 vs FY15 (ie, penetration of those add-ons did not increase per dollar of retail revenues). Finally the prospectus mentions that scale gives MTO the "ability to assist motorcycle manufacturers in managing large stock clearances where MotorCycle Holdings is able to utilise its wide distribution network and additional interest free bailment periods". Again, no quantified benefits - it's not obvious to that it would be that significant.




As a quick back of the envelope calc, MTO itself is trading at an EV/sales ratio of approx. 0.78. If they paid a similar multiple for these three acquisitions then they've invested $20m of capital. I expect they've paid significantly less, but they might still be using some debt finance (or the acquired companies must have some existing debt of their own). I have emailed the company to see if they can provide any further information re: the acquisitions esp. re: multiples paid.

I couldn't see anything in the prospectus and there is only very limited info re: the new acquisitions in Q2 2015 in the 2016 Annual report. Ie, they appear to have paid $3.7m ($3m of which was goodwill). If I read the annual report correctly, these two dealerships produced sales of $26.6m in FY16. An EV / Sales ratio of just 0.14x. If they can achieve similar profits from those dealer sites as the existing business, then they are likely to be strongly value accretive. Which is why I'm a little frustrated that more information is not being disclosed about the acquisitions!