Automotive accessories supplier Bapcor ((BAP)) is full steam ahead despite disruptions caused by the pandemic, reiterating growth targets for the next five years. The company has refrained from providing its usual guidance but did deliver a detailed trading update, highlighting robust May-June trading conditions have continued into July.
In FY20 gross profit was up 11.8% while operating earnings (EBITDA) were down -4.1%. While July sales may have been strong, growth rates are expected to ease back, although UBS assesses there is also scope for an improvement in earnings margins.
Credit Suisse found the results hard to fault, noting demand drivers are intact and this should sustain above-trend sales in FY21. Valuation is now only 7% above levels immediately prior to the sell-off on the outbreak of coronavirus and there is heightened expectations surrounding the amount of private vehicle kilometres being driven over the next two years.
There is no doubt Melbourne’s lockdown, and to a lesser extent Auckland, will affect business in the months ahead but the broker asserts the rest of Australia is demonstrating how the automotive aftermarket industry will endure once movement restrictions are withdrawn.
Citi also conservatively assumes like-for-like sales growth will slow down over the next five months, to 3% and 5% in trade and retail, respectively. This will occur as pent-up demand subsides and Burson cycles promotions.
Consumer expenditure may also be affected by the scaling back of JobKeeper and a slowing in superannuation withdrawals. Nevertheless, should consumers continue to use personal vehicles instead of public transport and delay new vehicle purchases this will line up the skittles for Bapcor.
In the second half, gross margins declined by -111 basis points because of FX headwinds and stock obsolescence. However Citi estimates FY21 gross margins will increase to 47% as private-label penetration expands and the Australian dollar strengthens. One-off costs associated with obsolescence should also disappear.
Growth Targets
The company’s 5-year growth targets include a 29% increase in trade stores to 240, commercial vehicle stores up 114% to 90 and Autobahn up 49% to 200. Thailand is also expected to expand to 80 sites from just six currently. Moreover, the new Melbourne distribution centre will become operational next year.
Morgans expects cash flow should almost fully fund the dividend and capital expenditure obligations in coming years and, while consumer sentiment may be distorted given the extent of the economic stimulus that is occurring, the industry should prove resilient at the very least.
The broker’s forecasts require around 7.7% growth in the base business which should be readily achievable. This excludes the benefits of acquisition contributions and any reduction in corporate costs. Morgans also points out Bapcor did not receive any government subsidies in Australia in FY20 although was eligible for $3.9m of NZ subsidies doing stage 4 lockdowns.
Credit Suisse speculates, even factoring in lower cash flow conversion versus company estimates, around $60m of growth capital expenditure can be self-funded along with $60m of dividend payments, and net debt still fall. Ironically, the broker assesses Bapcor now presents as potentially under-geared.
Citi agrees the valuation is undemanding as Bapcor offers exposure to defensive earnings that should be relatively resilient even as economic conditions deteriorate. There are also multiple long-term growth opportunities in private-label penetration and international expansion.
The broker also believes the strong trade momentum during July implies a positive outlook for GUD Holdings ((GUD)), one of Bapcor’s top 15 suppliers. GUD Holdings has a lagged relationship with the sales of its key customers at around 4-6 weeks.
FNArena’s database has six from six Buy ratings for Bapcor with a consensus target of $7.75 that suggests 11.9% upside to the last share price. Targets range from $6.90 (Macquarie, yet to comment on the results) to $8.45 (Morgan Stanley).
