Bapcor Attractive Despite Soft Result

Australia | Feb 14 2019

Australia's automotive parts sector has weakened over the past few months and Bapcor is not immune. However, brokers consider the business solid and defensive, and the sell-off in the stock overdone.

-May have lost market share in automotive parts to protect margins
-Cash conversion is expected to be better in the second half
-Franchise repurchase strategy producing results


By Eva Brocklehurst

Both trade and retail slowed for automotive parts business Bapcor ((BAP)) in the second quarter. Management expects some of the build-up in inventory experienced in the first half should reverse in the second, as this stemmed from the timing of product launches and shipments. Therefore, cash conversion is expected to improve.

The domestic automotive sector has weakened over the past 3-6 months and Bapcor is not immune, brokers point out. While the softness should persist through the balance of FY19 the business is considered solid and defensive.

The company has revised net profit growth guidance to 9% or so for FY19, on the expectation that the soft conditions will persist over the balance of the financial year but brokers are comfortable with this guidance. Morgans expects the company will have a few other levers to pull in the event that trading does not improve, such as supplier support and improved terms from the potential refinancing of debt.

The company has met budget for January and, while like-for-like sales growth is still subdued, has warned about reading too much into the start of the year, as this is a seasonally quiet period.

Operating trends may have weakened but Macquarie suspects the sell-off in the stock is overdone. The broker believes there is a margin of safety, as a deceleration in organic growth is factored into guidance.

Morgan Stanley suggests expectations were low in any case, although acknowledges a little disappointment with the outlook. Gross margin expansion from private label growth and NZ synergies brought first half earnings into line with estimates. The company is expected to be able to push prices ahead of inflation.

Buying Opportunity

The sell-off presents an opportunity to buy the stock in a year where there is below-trend growth, Morgan Stanley asserts, reiterating an Overweight rating. Moreover, momentum has been maintained in in the rolling out of stores.

The main concern for UBS, is the amount of caution expressed by the company's usually optimistic management. A slowdown is being witnessed across the board in New Zealand as well as Australia.

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