Quarterly Report & Industry Wrap Up

Welcome to the Slattery Asset Advisory
1st Quarter Report for 2016.

The Quarterly Report is read and valued by many of Slattery’s clients to keep ahead of the market for key industry trends, insights and movements in asset values.

In this report we reflect on asset trends over the start of this year and contemplate where we expect asset values to go in 2016.

The Slattery Asset Advisory and Slattery Auctions teams have been incredibly busy over the first quarter of this year, particularly in Western Australia and Queensland. The higher work flow has meant greater efforts to find good buyers both domestically and internationally.

As always we have included some key trends in the report to give our valued clients a good idea of how we are tracking against the market.

Slattery Asset Advisory

Slattery Asset Advisory had a very busy quarter that has taken our valuers and asset managers to all corners of the country and across all types of asset classes. We have been particularly busy with mining assets in the north west of Australia whilst also advising on marine assets in Tasmania.

As part of our strategic re-marketing advice, Slattery Asset Advisory has been assisting clients to obtain greater value for the sale of their goods in WA by targeting the stronger buying markets on the east coast. By engaging with our east coast based buyers and assisting them with their transport and logistics needs we have been able to bridge the concerns around the costs of transporting assets from the west coast to the east coast.

Slattery Asset Advisory recently advised a client to reject offers on a fleet of light commercial vehicles, which represented 20% less than those prices being achieved on the east coast. For the cost of approximately $600 per vehicle, we were able to return an additional $3000 per vehicle in higher prices.

To give you an insight into the consideration of our buyers, we have set out below some indicative pricing on a range of asset types to transport assets from WA:

In many circumstances, we are presently seeing a price differential that justifies buyers covering these transport costs particularly with the lack of small to medium sized earthmoving assets in NSW.

Quarterly Sales Round Up

Mining and Earthmoving

The market for mining and earthmoving equipment has continued to plateau from the previous two quarters. The heavy mining related equipment has unsurprisingly remained subdued whilst the smaller to medium sized equipment has been selling quite well.

New earthmoving and plant sales

As always we look to sales of Caterpillar as an indicator on the health of the earthmoving and mining plant sector. Sales for Caterpillar declined in all regions around the globe and across all industry segments over the first quarter. In the Asia Pacific sales declined 23%. Across the board sales are down due to significantly reduced demand.

Large mining assets

Despite the very challenging conditions in the sale of ultra-class mining equipment, Slattery Asset Advisory successfully negotiated the sale of package of 777G dump trucks and 992K Wheel Loader in the first quarter. These assets had been advertised for sale online for close to 12 months without much activity. When asked by our banking client to consider some alternative solutions, Slattery’s was able to deliver a result to the client within a month.

This example underpins the changing market when dealing with ultra-class mining assets. It is not sufficient to expect that an asset can be simply advertised and expect buyers to come to you. It is critical that any sales agents are very considered in developing a tailored remarketing strategy and extremely proactive in executing that strategy. We have found the most effective sales strategies have been to engage with our existing buyers whilst also approaching new buyers to determine levels of interest.

Whilst noting that sales are still possible and continuing in this market, the values for the assets are depressed and vendors need to manage their expectations on the final sales result, especially in the context of what may have been paid to originally purchase the asset. This is particularly true of older equipment. Previously there was a market to sell these larger assets as parts only however the appetite for this has since reduced significantly.

We expect this segment of the market to have increasing volumes come on to the market in the next 3-6 months, which may impact both values and timeframes to achieve an asset sale.

Small to mid-size used earthmoving equipment

In contrast to the negative reporting in the ultra-class equipment the news is all good in the used small to mid-sized plant and equipment sector.

The strong sales results we saw over the last quarter have continued into this quarter across a range of asset categories.

NSW continues to be the strongest market nationally for plant and equipment with high levels of business confidence. Whilst the demand is strongest out of NSW, the supply has been much lower than normal. Victoria has had strong sales but are finding most of their buyers are shipping sold assets interstate and overseas. Some of the older machines are heading to the middle east. Our Qld office has had both good levels of supply and demand with buyers coming both locally and from NSW.

WA is still finding the bulk of their buyers for plant and equipment coming from the east coast. Slattery has also sold a number of assets overseas into the Middle East. We expect demand from interstate to underpin asset values in WA for some time as supply outstrips local demand and the challenging market conditions.

With safety and maintenance on government funded construction sites paramount, operators are opting for the most modern and well-presented machines on the market.  We see the greatest demand for “work ready” units as opposed to a machine that will require some repairs prior to generating an income.

Mining and Earthmoving Sale Highlights

Road Transport

Volvo trucks: the new force in the market

Australian truck users have long had a love affair with American manufactured trucks. Kenworth has long been the market leader in prime mover sales in Australia with daylight between Kenworth and second place. Western Star and Mack have also enjoyed strong popularity however times appear to be changing and quite rapidly at that. Whilst Kenworth still maintains the dominant market position, Volvo has raced to the front of the pack in previous years to show itself as a real challenger to Kenworth’s market dominance. We reported in our last quarterly report that Volvo in December 2015 had knocked Kenworth off the mantle to take No 1. position for truck sales for the month for the first time.

There are a number of reasons as to why Volvo has enjoyed such a rapid ascendancy. The issue of parts availability and after sales service that previously gave the North American manufacturers a competitive advantage has now been overcome by the Europeans, and in some cases have surpassed the North American manufacturers. Volvo in particular has focused a great deal of time and effort on improving their back end service offering.

New truck sales

The new truck sales figures in Australia were, as is usually the case, sluggish to begin with however sales picked up in March to round out the quarter.

The heavy-duty segment is again struggling with lower sales figures for new heavy duty trucks. Sales are down 6% as compared to the 1^st quarter of 2015, which in itself was a softer quarter. Manufacturers are remaining positive with reports that there have been a number of new orders filling the books in the heavy duty segment.  Sales figures for Freightliner in the first quarter showed a rebound on a terrible 1^st quarter for 2015 with an increase of 23% from the same time last year. Volvo continues to be a strong performer in the market.

Some major news announced in February was that Caterpillar would be ceasing production of their Caterpillar prime movers (known as on-highway vocational trucks). Caterpillar was a powerhouse in the truck engine market before commencing manufacturing of its own prime movers in 2011. The news is likely to have little affect on the Australian market unless Cat chooses to again sell truck engines to other major manufacturers. Kenworth prime movers with Cat engines were one of the more popular prime movers in Australia.

In the medium duty segment, Isuzu has continued to dominate with a market leading 30.7% of market share. Hino has been slightly softer than previous periods, whilst Fuso has seen improvement.

Used truck sales – Heavy duty

Prime mover volumes have been down in the used truck market sector similar to the trend in new truck sales. Whilst the sales volumes have been down, the sales results through auction have been strong. Similar to the previous quarter, the lower supply of prime movers is more pronounced in Victoria and NSW, which conversely is where we are experiencing the strongest demand from buyers. This is keeping sales results for prime movers high and has continued through from the previous quarter. Demand from the Victorian and NSW buyers is flowing into other markets in Qld and WA where there is more supply but fewer buyers.

We have noticed that demand across all states tapered off towards the back end of March and into April. We suspect this was due to the regulatory uncertainty arising from the laws surrounding minimum pay thresholds for owner operator drivers. We note that the Government abolished the road safety remuneration tribunal in April prior to the increase in minimum wages being introduced.

Our Victorian office reported an increase in volumes and activity over February in particular, which also saw their best sales results of the year. Our asset managers have reported on strong demand for truck dealers who have been very active at all of their auctions. This was seen with a lighter spec prime mover on behalf of a council that brought an outstanding result above retail value at $42,000.

Our Qld and WA offices have had the highest volume of heavy duty trucks going through their auctions, which have mostly come from insolvency matters or direct repossessions from our banking and finance clients. Many of these assets had previously been working in or servicing the mining sector. We have been seeing an increase in the fallout from the mining downturn. We have also seen increased volumes from our clients in local government.

One of the issues facing the Qld and WA teams is that a large number of the assets coming to auction are very heavy specification prime movers used predominantly in bulk heavy haulage or transporting of heavy plant and equipment. With the large reduction in demand for these services, the buyers are avoiding any capital expenditure on these assets.

Additionally, many of the tri-axle prime movers used in these operations are not able to legally operate in any other states other than WA and Qld. This limits the market for these assets to those states who are experiencing the oversupply in similar assets.

Medium and lighter duty trucks

In the used truck market, the popularity for the medium duty Japanese manufactured trucks has continued throughout all of our offices around the country. In particularly there has been very high demand for medium rigid tilts and tippers. The reliability, after sales service and residual value on resale of the Japanese makes continues to shine through in all the rigid categories making them exceptionally popular with buyers.

Trailers

Trailers have continued with mixed results depending on the purpose of the trailer itself. The age of the trailer also impacts on the results with late model units still receiving solid demand whilst the older trailers have been very challenging to achieve solid results.

As noted in the previous quarterly report, side tippers had possibly the most significant reduction in values over the 2015 year and 2016 year to date. This is due to the drop in demand for bulk haulage assets heavily impacting the price of side tippers. The downturn in prices for iron ore and the decline in output of the Coal mines saw a major influx of surplus side tippers of every configuration.  Five years ago, a near new trailer would achieve a new price at auction as the waiting list from the top manufactures meant 12 months from order to delivery.

We note a recent auction at the start of the second quarter year to date saw some incredible results from Slattery’s WA team for side tippers, completely turning around from the 1^st quarter. We believe this may have been caused by some changes to design rules allowing longer combination of side tippers. We are yet to see if this is a one-off event or a sign that the value in side tippers is returning.

Similarly values for low loaders remain unchanged for the same reasons. A recent sale of very large platforms also proved very difficult to find buyers and Slattery’s has taken a more bespoke approach to retailing the assets on behalf of our clients.

Large government auction in Qld

Slattery Auctions in Queensland were engaged by Maranoa Regional Council to manage the asset realisation process of a large fleet of surplus equipment including trucks, trailers earthmoving as well as small plant and equipment. The auction was a huge success with a 96% clearance rate under the hammer and the remainder sold by negotiation after the auction.

Due to the regional location of the auction in Roma, the success was due to the tailored marketing campaign that drew in a large number of regional buyers as well as buyers from metropolitan areas around the country. When conducting a sale of assets in a regional area, Slattery Auctions hybrid auction process has proven to be a powerful sales model. In this case we had very active buyers from around the country bidding through the simulcast portal.

Some of the standouts of the sale included:

Road Transport Sale Highlights

Motor Vehicles

New vehicle market

New vehicle sales were up 2.8% in the first quarter of 2016 in comparison to the same time last year. SUVs in particular have again performed strongly up 13.8% on last year, assisted by sales to business and government.

Toyota continues to lead the market across new car sales, whilst the Hyundai i30 is the market leader on total car sales.

Secondary vehicle market

The secondary car market has remained buoyant in the 1^st quarter of 2016 with sales results in our vehicle auctions very strong across the board. The strongest markets were again commercial vehicles, SUVs and luxury vehicles.

In the light commercial space, the Ford Ranger has been a clear standout. The star performer for the quarter was a 2WD 2012 Ford Ranger selling for $22,750 against a Glasses high valuation figure of $15,000. A new 2016 model can be purchased for $28,990 drive away. The popularity of the Ford Ranger has been consistent across all sites with our vehicle managers finding the lead time on a new Ford Ranger pushing their values up, particularly on the Wildtrak and 4×4 XLT models. Hilux’s and the VW Amarok continue to be selling well whilst Nissan Navara’s, Holden Colorado’s and Mitsubishi Tritons are a less favourable option for buyers.

Small vehicles continue to be popular with buyers whilst mid-size vehicles such as the Cruze and Lancer have been less favourable. Sports versions of more mainstream vehicles have also produced strong auction results.

New changes to importation laws

Last quarterly report we highlighted the impact of changes to dealer financing might have on the automotive car market. Since then there has been a new regulatory change that is equally likely to have a big impact on the secondary car market, that is the changes to used vehicle importation laws, which could have massive implications for the way Australians buy their vehicles.

From 2018 onwards, buyers will be able to parallel import brand new cars and avoid tariffs on imported used cars, potentially saving thousands of dollars over local dealers. The list of approved countries hasn’t yet been decided but preliminarily reports suggest both Japan and the United Kingdom have been approved.

The cars must be no more than 12 months old, and must have no more than 500km on the odometer. The new laws are unlikely to make it attractive to import cheaper cars, however overseas vehicles that are slightly below the luxury car tax threshold of $64,000 are likely to offer significant discounts to cars sold by Australian dealers.

The abolition of an inconsistently applied $12,000 special duty on imports will also give comfort to importers. Cars that are imported will have a specific plate affixed and their details added to a new register, as well as the traditional blue-slip inspection and registration process.

On the prestige and luxury end of the market, there are some quite significant savings to come from imports. A Porsche 911 Carrera S will cost you around $274,000 to buy in Australia, while an import including freight and government fees could potentially be a full $44,000 cheaper.

The negative side of imports is that local dealer networks have indicated they are unlikely to service or support imported vehicles.

The long-term impact and take up of the new laws is unknown, however we anticipate that large volumes of imports will enter the market through companies that already undertake similar operations in New Zealand. Local dealers will have to compete with lower prices and ultimately drop local prices. This will further push down prices in the secondary car market, which has already seen prices reduce dramatically over recent years.

Motor Vehicle Sale Highlights

Agriculture

Off the back of a tough season where crop farmers experienced unfavourable weather conditions within Victoria, prices on larger agricultural gear has been surprisingly positive with buyers from interstate purchasing the majority of the large equipment such as harvesters and 300+HP tractors.

120HP tractors have been consistently popular around the country with farmers still paying close to retail prices at auction.

Grain spec trucks and tippers have not been performing well as a result of poor back to back harvests. Prices have reflected these difficult conditions.

We have seen a number of Agrison tractors come on to the secondary market. Our experience has generally been one of rejection by the buyers who have not been positive towards the brand. Anecdotally, we have been told that it’s not uncommon for Agrison tractors to experience major mechanical failure within 20-200hours of use. We have also had complaints on the time taken to source parts and we are told repairs are expensive. For the most part, buyers have remained loyal to more reputable brands such as John Deere and Case.

Agriculture Sale Highlights