Third Quarter Report for 2017

The past quarter has generally seen very positive market conditions across the road transport, mining, earthmoving, automotive and agri sectors. This 3rd Quarterly Report for 2017 sets out the insights and trends observed by Slattery Asset Advisory experts across all these industries.

The good news is predominantly in the mining, earthmoving and road transport sectors as all market segments are powering along.

This quarter saw Slattery’s happy to call a sustained recovery in asset values in the mining sector as values in the secondary market are strong and coincide with the 3^rd straight quarter of increased sales and revenues for Caterpillar globally.

The road transport sector has been powering and new truck sales are looking very healthy. We offer an insight in this report about the impact of the driver demographics in Australia and the low uptake of truck driving as a profession on prime mover values.

The Slattery Asset Advisory team has been busy on some sizeable engagements in Africa and also welcomes the newest member of the team, Kevin Patchett, a mining specialist based in Perth.The quarter in short:

• The secondary market for used ultra class mining equipment has shown very positive signs in comparison to recent history off the back of a sustained recovery in asset values.
• The market for mid-size civil equipment is very strong around the country but in NSW and VIC in particular.
• Road Transport sees new heavy duty truck sales on track to hit a new record with a jump of 30% on the previous year. The secondary market has been strong across refrigerated, general, metro, tippers, bulk and heavy haulage assets.
• The demand for quality trailers has continued relatively unchanged over the past quarter and continue to achieve good results.
• The asset advisory team has been busy in both road transport and mining. Hard rock drilling assets have seen a resurgence in interest of the back of the recovery in mining asset prices.
• SUVs continue to dominate the market in new and used sales as the wider market is on track for another record year of new car sales.

Slattery Asset Advisory

The Slattery Asset Advisory team has been very busy over the past quarter with increased activity in both the road transport and mining sectors in Australia and overseas. We regularly get asked about the state of drilling rigs in the market and the past quarter has seen more pre-finance activity on both piling rigs used in construction and hard rock drilling assets used in mining exploration. The recovery of commodity prices since the start of this year appears to have encouraged exploration activity again leading to this increase in asset advisory work.

The past quarter has also taken the Slattery Asset Advisory team to Africa to work on some very sizeable engagements, which will continue for some time. In Australia, our mining experts have been occupied in WA on a range of projects.

The increased activity in WA also coincides with Slattery bolstering its existing mining expertise with the start of our new valuer on the ground in Perth, Kevin Patchett. Kevin comes to us with over 30 years experience in the civil and mining industry starting his career as a fitter before going on to more broader fleet maintenance, plant management and national plant disposals. Kevin’s background also extends across three jurisdictions NZ, PNG & Australia. Kevin’s intimate knowledge of mining plant and equipment will be incredibly valuable for future client engagements in this sector.

Quarterly Sales Round Up

Road Transport

New Truck Sales

The good news in new truck sales has continued throughout the third quarter with July, August and September all individually recording huge growth on year on year sales data, which in turn has put new truck sales on track for a record year after some lacklustre results in recent years.

In the heavy duty truck market new heavy duty truck sales were an incredible 29.4% on the previous year totalling 7121 units to the end of August, representing an overall growth in sales of 16.5% on the previous year.

Kenworth has turned around its slowly diminishing market share with Volvo keeping a very close second place. Isuzu and Mack take up third and fourth place on the total units sold list followed by Scania, which has recorded an incredible 58.4% growth rate in total sales for 2017.

The medium duty segment has not recorded any significant growth figures for the year to date however this segment remains strong with not much change in market share between the dominant first place Isuzu, Hino and Fuso.

Light duty trucks had a healthy increase in sales with around 9% growth year to date on the previous year. Similar to the medium truck segment Isuzu leads the market followed by Fuso in second place and Hino.

Used Truck Sales

The secondary market for trucks in Australia has remained buoyant over the past quarter with the industry generally performing very strongly. Transport is performing very well across almost all sectors including refrigerated, general, metro, tippers, infrastructure, bulk and heavy haulage.

The enthusiasm to upgrade fleets seen in the new truck sales figures has carried over to the secondary market with lead times for new trucks encouraging buyers to buy from the secondary market and auctions in particular. New truck delivery times can be as much as 4 months with some manufacturers meaning that any stock offered via auction that is near new with less than 300,000kms is bringing retail or close to retail value.

With the demand for road transport assets in NSW and VIC at high levels and the generally long lead time to ramp up manufacturing output we expect asset values to remain strong for the next 12-18 months with little to no difference between auction value and retail value on good quality later model assets.

Used Truck Sales - Heavy Duty

After an incredibly strong period of sales for heavy duty tippers and dog trailers experienced at the start of 2017 where assets sold through Slattery’s for well in excess of their retail value, we have noticed sales results scaling back correcting on what was an overinflated market. Large scale infrastructure projects pushed these assets to some of the highest levels we have witnessed. Whilst prices have corrected we expect prices to remain strong over the remainder of the year into the new year as there is still strong demand from the industries they service.

There continues to be strong support for good quality late model prime movers. The lead times on delivery of new Volvos in particular have crept out, which has meant Volvos at auction have been achieving incredibly strong results. In line with trends reported in previous quarters the undersupply of general freight prime movers has continued with all Slattery offices reporting sales prices are higher as a result. A sale of a 2015 Volvo FH540 6×4 prime mover with 107,000kms for $200,000 in VIC and a 2015 FM series 4 prime mover with 70,000kms in QLD sold for $180,000 evidencing the strength of the secondary market for Volvo prime movers.

The Slattery NSW September truck auction offered a 2015 Freightliner FLX Coronado with 42,465kms, which achieved $150,000 representing 100% of the retail value to an end user. The Slattery Melbourne office offered a beautiful line up of a 2016 K200 Prime Mover and 2x 2014 and 2012 Kenworth T909 prime movers, all of which achieved 100% of their retail value at $305,000, $270,000 and $190,000 respectively.

Our QLD office has indicated that the demand for stock in Brisbane has been strongest from NSW and VIC based buyers. In particular from the Melbourne market for automatic, European cab over prime movers.

As foreshadowed in our last quarterly report, Slattery offices around the country and in particular in WA have reported that the demand for higher spec prime movers used in heavy and bulk haulage that suffered during the mining downturn have shown strong signs of recovery. This is due to the positive signs coming out of the mining sector in general. With lower volumes on the market at present we expect prices for high spec prime movers to remain healthy. Kenworth continues to be the most popular in the heavy spec prime mover market.

There is no change in the low appetite by the market for older, poorer quality prime movers, which continue to move at reduced prices. Older Kenworth’s however still have a loyal pool of buyers who will pay more for the Kenworth brand.

Market Insight – change in driver demographics

A demographic shift that has seen a lack of uptake of truck driving as a profession from the younger generation has resulted in a shortage of quality truck drivers across the industry. Feedback from the market has suggested that the lack of drivers has meant existing drivers will be more selective about what trucks they drive and for who. If a driver can dictate or chose their preferred truck they are more likely to take up a role. This has meant that companies are placing more focus on driver comfort when making purchasing decisions. Volvo, which has placed a massive emphasis on driver comfort in design, has been benefiting from this shift alongside fuel efficiency and lower emissions as major points of difference.

Used Truck Sales - Medium & Lighter Duty

The market for light and medium trucks has been particularly strong with our Newcastle office estimating an increase of 10% on sales results for Japanese commercial trucks over the past quarter. This was evident from the sales results of our July and August auctions in NSW, which offered a number of 3 tonne to 6 tonne tippers previously operated as part of a landscape business and sold for well above expectations. Two 2007 Mitsubishi Canter Dual Cab Tippers were purchased for 84% and 85% of the retail value and a 2010 Isuzu FTR900 Pantech truck was also purchased by an end user for 86% of retail value. In Victoria a 2014 Isuzu FXH 8×4 Tilt Slide truck with 188,968kms achieved $193,000 representing 105% of the retail value.

Buyers at these auctions gave feedback that there was a severe shortage of good quality small to medium size trucks on the market, which saw dealers also competing in the higher price bracket to obtain stock. One dealer indicated a shift in sales strategy to use auction houses to sell stock (rather than purchase) due to the higher than normal prices being achieved.

Trailers

The demand for quality trailers has continued relatively unchanged over the past quarter.

A listing in NSW of a very good quality set of 2015 Lusty Stag ‘A’ & ‘B’ tipper trailers was a highlight of the quarter and achieved $182,000 representing 100% of the retail value of the assets. The result was primarily due to the amount of infrastructure work that is going on in the NSW market, the rarity of the asset being such late model and near new condition, and the long 9 month waiting list for a new set from the manufacturer. This result is off the back of a 98% of retail result also achieved in NSW earlier in the year and reported in the 1^st quarter for a set of 2010 Lusty Dual Axle A and B combination tipper trailers.

The Slattery QLD office has reported that side tippers have seen the biggest increase with trailers making more than 50% more than the previous quarter. This is something that has been affirmed in our WA office which has seen an average side tipper go from roughly $25,000 per trailer towards the end of 2016 to approximately $75,000 for the same side tipper today, triple the value.

The Slattery Melbourne auctions have reported strong results on late model Tautliner B Double trailers that were in high demand in the early stages of the quarter. Low loaders, floats and drop deck trailers continue to be in short supply and sought after both in WA and eastern states for relocating civil equipment. These are now commanding stronger prices than the preceding quarter.

Mining & Earthmoving

New equipment results

The Caterpillar financial results released at the end of October saw Caterpillar announce another increase of sales and revenue in the third quarter up more than $2 billion dollars on the same time last year. Caterpillar noted an increase in end user demand across all regions globally and most industry segments.

Sales of construction equipment in China was cited as contributing to roughly half of the 31% increase in sales in the Asia Pacific region. Sales of equipment into the resource industry rose 29% in the Asia Pacific with Caterpillar noting that increases in certain commodity prices over the past year, along with continued commodity consumption, have resulted in increased mining activity and the need for maintenance and rebuild activities. We have previously highlighted after market part sales rising in Australia as a result of increasing maintenance activity after a long period of fleet operators holding on to their equipment longer and running out their maintenance programs to reduce costs.

Remembering that the 1^st quarter of 2017 saw the first year on year increase in sales and revenues in ten quarters for Caterpillar was followed by a strong second quarter, the third quarter of sustained recovery in sales and revenue by Caterpillar globally indicates that the strong recovery will be sustained and should result in a healthy outlook globally for mining and resource related assets.

Secondary market for Mining and Earthmoving plant and equipment

The secondary market for midsize civil equipment is currently very hot with incredibly strong demand for civil construction equipment and very low volumes being offered into the market. Whilst demand has not been as vociferous in the mining sector, we can comfortably state that there has been a sustained recovery in demand for mining equipment across most categories of mining equipment.

The appointment of external administrators to Brierty one of the larger contractors in WA should see a volume of equipment come onto the market in the current quarter and we expect this to be absorbed into the market easily for good prices. We will report on the results in the next quarterly report.

Ultra class mining equipment

After the third quarter of sustained improvements in new asset sales in the resource sector as well as stronger sales results in the secondary market, Slattery’s are comfortable in calling a recovery in prices that will be sustained in the near term for asset prices in the mining and resources sector.

Demand across mining and resource assets has been felt strongest in ultra-class assets used in open cut mining including shovels, bulldozers, rigid haul dump trucks and wheel loaders. Whilst demand has returned and sales prices recovered, we have not yet seen any significant volumes of ultra-class mining equipment offered on to the market leaving a question mark on the current depth of demand in the market. We have also had reports from rental and leasing companies that their utilisation rates have improved as demand returns.

In discussions with industry operators, we have received feedback on difficulties experienced in sourcing larger bulldozers and in particular the Caterpillar D10T range. Whilst demand dropped for dozers of this size during the mining downturn, demand has returned and there is very little availability on the market.

Drilling has been quietly recovering over the past year and whilst Slattery’s has not offered much in the way of drilling assets over the last quarter we have seen an increase in demand for new hard rock drilling assets. In particular the Slattery Asset Advisory valuations team has been very busy assisting clients with both piling rigs used in construction and hard rock drilling equipment used in exploration.

We have also witnessed some very strong results for crushing and screening assets over the last quarter and have offered a reasonable number of crushing and screening units into the market. A number of liquidation matters have resulted in more assets coming on to the market in both NSW and WA in recent times. Contractors servicing the demand for crushing and screening equipment have reported that there has been a slight improvement in rates further underpinning the increasing demand in the mining and resources industry.

Mid-size civil equipment

The market for mid-size plant and equipment used in civil construction is currently very hot driven by very high demand out of the eastern states and low volumes of assets available on the market.

Combined State and Federal Government infrastructure projects are positively impacting demand and prices in the civil equipment space. Our WA office has reported that one large contractor in WA, BGC, has predicted a national shortage of equipment which they expect will last for the next 2 years.

Graders

Graders have been in high demand throughout 2017 increasing prices across the board and this continues into the 3^rd quarter. The downpours of rain experienced over the east coast throughout the last quarter has damaged roadworks and construction sites that then require graders to assist with the recovery works.

In particular demand for Caterpillar 140M graders has increased as the previously more popular Caterpillar 140H graders now tend to have in excess of 12,000 hours making them less desirable. Demand was previously low for the 140M grader as it is a dual joystick operated machine versus the 140H’s steering wheel. Operators who did not want to shift to the new operating set up avoided upgrading to the new 140M grader impacting demand. This has however reversed in favour of lower hours as operators adjust and favour the increased visibility offered by the 140M.

Slattery’s in WA offered a 2003 Caterpillar 16H Grader with approximately 33,000 hours, which sold for $157,000 achieving a premium of 110% of the retail value.

Excavators

Excavators always have a broad appeal due to their multipurpose application and the quality and variety of the attachments available. The demand for excavators at present continues to be strong on the back of the large-scale infrastructure work continuing throughout NSW and VIC.

There is currently an undersupply of premium brand excavators on the market, which has led to buyers turning to second and third tier brands to fill the gaps and meet demand. Generally the second and third tier brands are single life machines as opposed to the premium tiers that are rebuilt for continued use. The Japanese and Korean brands in this second tier segment tend to be received better than Chinese built excavators. Two excavators fitting into this category over the last quarter, a Sumitomo SH145 Excavator with 3,600 hours in QLD achieved $80,000 and a 2011 Doosan DX480LCA excavator with 3500 hours achieved $125,000 both representing very strong prices.

Whilst there are large scale civil construction contracts available to move huge amounts of earth, we expect excavators up to 40 tonnes to continue to be in demand.

 Wheel loaders

The market for front end wheel loaders over the past quarter has remained strong. Front-end wheel loaders are typically involved in bulk goods handling, which has a much more consistent level of demand due to the ongoing market need for such assets. As a result changes in values tend to take longer to impact the secondary market compared to that of other market segments.

With the current recovery in resources coupled with the existing ongoing infrastructure projects leading to increasing workflow and demand for new machines, the delivery times for new machines has extended thereby increasing the value on the second hand market.

Bulldozers

Dozers across the board continue to be strong, but surprisingly, one dealer has noted that whilst younger, lower hour machines are selling at very good prices, it’s much easier to currently sell older dozers particularly in the D6 range.

His reasoning was that the more expensive larger and younger machines were predominately only purchased by large scale operators such as civil contractors and mining companies, whereas the smaller, older machines had a larger buyer market that also includes farmers and developers to name a few. The recent sale of a 2009 Caterpiller D6N LGP Swampy in Western Australia with 10,600 hours for $184,000 lends weight to this theory as it represented approximately 115% of the retail price.

Motor Vehicles

New Motor Vehicles sales

New car sales are narrowly on track to hit another annual record for new car sales, which have hit annual volume sales records for 3 out of the past 4 years. The year to date tally currently sits at 984,931 units with another two months to run.

SUVs continue to lead market share with 38.5% of the market after taking over from passenger sedans. Light commercials in the past quarter were also very active growing to 20% market share with consumers taking to the “lifestyle” option that the light commercial vehicles such as the Ford Ranger and the Toyota Hilux offer.

Two small cars and a light commercial vehicle topped the sale numbers for October showing the changing consumer tastes in Australia. Toyota continues to dominate among the manufacturers as Australia’s preferred manufacturer with the Toyota Hilux and the Corolla taking out 2 of the top 3 most sold models.

After many months of decline Western Australia posted a rare increase of 11.6% growth in October sales against the same time last year, however overall WA’s new car sales continue to decline overall and are down 2.4% for the quarter.

Secondary Motor Vehicle market

The secondary market around Australia has seen buyers be very selective about what they are purchasing with some makes and models selling for retail value while other models can barely attract a bid and require substantial discounts to achieve a sale.

Similar to the new vehicle market, the strongest performers in the secondary market are SUVs and light commercials. The Ford Ranger and Toyota Hilux continue to achieve retail or close to retail value whenever they are put to auction as they have done for the past 12 – 18 months.  A 2014 Toyota Hilux SR sold for $31,400 representing 97% of the Glasses retail figure. In the same category, we have seen the new Nissan Navara receive a very warm reception from the market, which we expect to be reflected in the secondary market throughout their life.

An increase in end users at auctions around the country searching out value has seen competition fierce at our auctions however the demand has been fickle for passenger vehicles. In the small car sector automatic transmission vehicles continue to outperform manual transmission vehicles in a like for like price comparison. Toyota Corolla continues to be the most sought after, followed by Mazda 3 however low numbers of these have been presented at auction.

With the ongoing decline of new car sales in Western Australia, sales in our Perth auctions have been challenging with buyers only interested in very good condition, low kilometre vehicles with all other vehicles selling at a reduced price point.

The Slattery Sydney office has reported very high demand for prestige and luxury vehicles with a number of high end Porsche, Audi and HSV’s selling very well in the 3^rd quarter. Australia generally has taken to higher end automotive vehicles, which is reflected in the demand and strong competition at all Slattery auctions around the country for these assets. A 2016 Porsche Cayman GT4 981 sold for $164,000 and a 2016 Porsche Macan GTS sold for $104,000 in Sydney both representing 109% and 102% of their Glass retail price. In Victoria a Mercedes E400 with 29,000kms sold for $81,000 representing 96% of the Glasses retail value. Not to be outdone by the European models a 2015 HSV Clubsport R8 Gen F in Perth with 15,000 kms sold for $52,000 representing 95% of the Glasses retail value.

We have previously reported on the structural change being experienced in the “used car dealership” model with many small independent car dealerships closing down or switching to larger single location warehouse models. In Western Australia both the listed AHG group and John Hughes Automotive (2 of the three largest dealerships) opened new large warehouse dealerships. AHG group also acquired a majority share in Carlins Automotive auctions expanding their sales platforms for used and trade-in vehicles. This follows a move by the listed AP Eagers group to acquire Brisbane Motor Auctions.

The growth in pre-acquisition online research by consumers and the power of digital marketing has accelerated this structural shift in the market, which we expect will continue and the used car industry to be dominated by the larger dealership groups.

Agricultural Industry

Throughout the past quarter we have seen an increase in the number of agricultural assets coming onto the market. The Victorian market has been the strongest across the country with the highest volumes through Slattery premises.

The market for tractors used in broadacre farming and cropping has seen a split in demand with 100hp up to 150hp seeing an incredibly strong response from the market due to their versatility across all areas of farming however demand for tractors in excess of 200hp seems to drop away. A 95hp 2014 Kubota M9540D tractor with only 93 hours sold in our Brisbane office for 100% of the retail value at $62,000 due to the low hours and desirable configuration evidencing the strength in the market for this class of tractor.

Airseeders over the last have struggled in the current market due to the significant cost to decommission and transport these assets. When these assets are decommissioned buyers will require a crane and float (and in some cases a pilot) to transport the asset to its new location. Buyers naturally take into account demobilization and transport which in turn puts downward pressure on results in the secondary market.

Hay equipment such as rakes and balers have sold well leading into the start of the season.

Our offices are also reporting that harvesters have generally been an underperforming asset over the past quarter due to unfavorable season conditions in many areas across the county but most notably in QLD and NSW. Buyers of these assets are being more selective before purchasing and are looking for harvesters that have low hours, have been well maintained and are being sold as a complete package with the machine, comb and trailer.

Whilst values for newer assets remain strong, harvesters that are 5 years of age or older and have no maintenance records are generating minimal interest and the hardest hit in the current market. This is reflected in the sale in our Melbourne premises of a 2013 Case IH 7130 Axial Flow Combine Harvester with 1,000 hours that sold for $217,000 representing 83% of retail value whereas a slightly older Case IH 7088 Axial flow Combine Harvester with twice the hours at 1,954 hours brought $120,000, which was a softer result than our agri experts would have expected.

Within the market we have seen an increased demand for grain spec tippers, this is due to the shortage of quality second hand assets coming through. The feedback we are receiving from the industry, farmers and contractors is that these assets are becoming rare to find and will continue to drive the market for these assets up.

In the diary sector, we have seen minimal assets coming through despite the current challenging conditions in the industry. Our asset advisory team has however been assisting on files to restructure pastoral companies working in the dairy industry.