AMA And Suncorp Complete Negotiations, “More Modest Outcome” For Capital S.M.A.R.T

Negotiations between AMA Group and Suncorp Group over financial year 2024 repair re-pricing for Capital S.M.A.R.T under the Motor Repair Services Agreement (MRSA) have concluded, with the discussions ultimately resulting in what AMA described as “a more modest outcome for Capital S.M.A.R.T pricing” than originally forecast.

While specific details of the new pricing and surrounding terms are “commercially sensitive”, AMA disclosed some key features of the agreement. The new pricing will apply to all repairs booked from 1 July 2023 and returns the arrangement to annual pricing reviews with a clear re-pricing mechanism. This provides for pricing to be adjusted with reference to industry-specific inflationary measures, with additional mechanisms to capture material changes in severity up to agreed tolerances. One particular additional mechanism allows for price re-negotiations for significant external events where inflationary measures exceed agreed tolerances.

The arrangements include transitional support throughout FY2024 when AMA will implement several operational initiatives planned to improve Capital S.M.A.R.T efficiency and profitability.

Traditional support payments will cease at the end of FY2024, but the loss of these is expected to be offset by benefits realised from several operational initiatives. These include a programme for converting the majority of Capital S.M.A.R.T sites to undertake a broader range of severity repairs, reducing vehicle movement between sites; increasing use of non-OEM parts to reduce costs consistent with the insurer framework; adjusting business processes; and further employee training to realise operational efficiencies.

AMA said that as its FY2023 audited results are being finalised, it anticipates that the remaining $58 million balance of the goodwill of Capital S.M.A.R.T will be fully impaired, essentially leading to a situation where the company expects to attribute zero goodwill toward the business. It leaves the unamortised portion of the MRSA held on the Capital S.M.A.R.T balance sheet at a value of approximately $166 million.

Capital S.M.A.R.T was previously acquired by AMA in 2019 from Suncorp under AMA’s previous management.

As a result of the revised agreement, AMA expects Capital S.M.A.R.T to contribute to its EBITDA in the range of $32 to 36 million on a post-AASB 16 basis, and $16 to 20 million on a pre-AASB16 basis (excluding approximately $7 million of rebate benefits captured within Group results) in FY2024.

The company’s share price initially fell 11 per cent to an intra-day low of 12¢ on the news. It later recovered ground, closing 3.7 per cent lower at 13¢.

AMA added that it has a more conservative outlook for AMA Collision based on the observed run rate performance and margins in H2 2023, which it said is also likely to lead to impairment of goodwill of approximately $50 million for that business in its FY 2023 accounts. The company also expects a slower than previously forecast ramp up in ACM Parts, adversely impacting annual guidance by $4 to 5 million compared to the year-end run rate.

AMA issued revised FY2024 guidance of between $86 and $96 million in normalised post-AASB 16 EBITDA.

According to AMA, the longer-term financial aspirations for the company remain unchanged with “meaningful opportunities” to further enhance earnings expectations in future years through operational and business productivity initiatives.