Automotive aftermarket supplier GUD Holdings ((GUD)) has impressed several brokers with a trading update, as its performance across several units has improved and there has been early success with cost reductions. UBS found the investor briefing incrementally positive regarding the opportunities for cost reductions coupled with price rises, while reinforcing the strength of the company’s brands.
GUD Holdings has highlighted a mixed outlook for the automotive aftermarket industry, citing regulatory changes affecting electric vehicle adoption rates and original equipment manufacturer (OEM) warranty changes.
Wilsons was encouraged by the update, noting margins will have benefited from price increases across most business units as well as some reductions in the cost of goods sold (COGS). The broker was particularly keen on the company’s insights into the filtration category, along with the positioning of Ryco and Wesfil and market research data highlighting the strength of these brands.
The broker, not one of the seven stockbrokers monitored daily on the FNArena database, retains an Overweight rating with an $11.05 target.
FY20 sales trends have improved across some categories but remain negative on a like-for-like basis. Given currency pressures, new competition in the filter market and major customer supply consolidation, UBS suspects FY20 guidance will be difficult to achieve without any contribution from acquisitions.
Guidance has been retained for “modest” earnings (EBIT) growth in FY20, although the US dollar continues to strengthen and this will require price increases for various products, the broker points out. Around 75% hedging is in place until March 2020.
Management anticipates domestic cost inflation will be offset by various measures, including supplier cost reductions and operating efficiencies, confident sustainable growth will be supported by a buoyant Australian automotive aftermarket.
Acquisitions
There is substantial potential for acquisitions across product lines the company does not cover as well as export opportunities. Three areas are in focus: further reductions in COGS and logistics, organic growth opportunities and acquisitions.
GUD Holdings remains on the look-out for acquisitions although it has bypassed four since June because of either a lack of strategic fit or perceived inability to reach the required financial hurdles.
Ord Minnett is not surprised, given the major issues faced by the acquisition of AA Gaskets. UBS flags significant acquisition potential, with around $90m in headroom at up to 2.5x net debt/operating earnings (EBITDA) without the need for fresh equity.
Most brokers on FNArena’s database are yet to cover the trading update. The database has one Buy rating (Ord Minnett), three Hold and one Sell (UBS). The consensus target is $10.66, suggesting 2.9% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.5% and 5.9% respectively.
