Bapcor Surprises With NZ Synergy Upside

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Automotive parts business Bapcor has quantified the expected synergies from the acquisition of New Zealand’s Hellaby Holdings and surprised on the upside.

-Healthy FY17 expected, with strong catalysts in the outlook
-Future growth drivers include warehousing, store roll-out and margin expansion
-Intense retail competition and integration risks may weigh in the short term
By Eva Brocklehurst

Bapcor ((BAP)) has quantified the expected synergies from the acquisition of New Zealand’s Hellaby Holdings. The detail has provided greater upside than brokers were expecting.

Bapcor expects to reduce Hellaby corporate costs to $1m from $6-7m and operating earnings (EBIT) are expected to benefit to the extent of $8-11m from FY18-20. Synergies are largely driven from procurement, increased sales, freight and shared business services. The automotive division is the focus of the company’s plans, with the resources and footwear segments of Hellaby up for sale.

Morgan Stanley observes the process of extracting benefits is similar to that following the acquisition of the automotive division of Metcash ((MTS)). Management has assessed nine project areas where a review of costs and revenue has been completed and should be delivered in the next three years.

Morgan Stanley believes there is further upside in the long-term, as the company invests in the business and warehousing. The broker notes operating earnings upside calculated by the company equates to 3.1-4.3% of Hellaby’s automotive sales, similar to the percentage upside acquired from the Metcash automotive acquisition, and Bapcor delivered synergies from that acquisition at the top end of the range.

UBS had previously forecast that all NZ head office costs would be removed but did not incorporate any synergies. The broker highlights that the company has suggested synergies beyond FY20 are available in the form of lifting private-label penetration and warehouse rationalisation. UBS incorporates the divestment of non-core assets as discontinued items in forecasts, assuming they are divested in the current quarter for a combined value over $120m.

Catalysts

Warehouse benefits may come at a cost, with management noting an update will provided at the FY17 results, but Morgans suggests the returns could still be meaningful. Meanwhile, the company is continuing the process of divesting non-core assets and will make further announcements regarding these at the appropriate time. A portion of these expected to be divested in the coming months and Morgans factors in $111m of asset sales in FY18.

Macquarie understands that while non-core asset divestments are progressing, any delays will raise concerns over the proceeds that are achievable and the implication for the company’s ability to reduce debt.

Morgan Stanley is confident the company will deliver a strong FY17 while the catalysts and growth drivers have been identified for the next three years. The broker is also confident in the medium-term growth outlook from the initiatives relating to store roll-out, margin expansion and the investment in warehousing. This opportunity is not reflected in the current share price, Morgan Stanley believes, and an Overweight rating is reiterated.

Separately, the company will open a trade storage Southeast Asia in the next six months in a joint venture. And initial investment of $5m is expected to fund greenfield developments and the first outlet to open by the end of the year.

Outlook

UBS believes the weaker macro outlook will impact the retail-exposed areas of the business, which comprise 20-30% of earnings, although the economic cycle has not generally affected car servicing habits. The broker expects the retail division to deliver around 2% sales growth in FY18.

While electric vehicles will eventually negatively impact servicing habits, UBS believes the trends are unlikely to materially affect the company in next 10 years.

Macquarie is positive about the defensive nature of Bapcor’s trade business, which incorporates 65% of FY17 earnings. The broker also believes the company’s model will prove resilient in the face of online competition given the advantages associated with its distribution.

Nevertheless, intense retail competition and integration risks reduce the broker’s near-term enthusiasm. These factors are expected to weigh on valuation in the short term and Macquarie retains a Neutral rating.

There are three Buy ratings and one Hold on FNArena’s database. The consensus target is $6.39, suggesting 12.4% upside to the last share price.
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