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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.

UBS suspects that Bapcor may have lost market share in order to protect margins,yet concludes that the company's trade exposure, over 80%, is highly defensive should a material slowing of consumption occur.

The broker trims earnings forecasts but still believes a return to double-digit profit growth is likely over the medium term. Morgans, meanwhile, upgrades to Add from Hold, doubting trade comparables will stay at subdued levels over the medium term.

The broker is confident in the company's guidance, which does not require a demand uplift. A growth profile of over 10% should be sustained in FY20 and FY21 and Morgans is also assured by the company's inventory management, that should mean cash conversion is better in the second half.

Macquarie notes there was a divergence between company-owned Autobarn stores and the performance of franchises which, while validating the re-purchase strategy, creates margin headwinds in the near term. The broker expects this situation should gradually normalise for the retail arm. The company bought back 22 stores in 2018.

Outside of the retail business, margins were more pleasing to the broker, supported by growth in the Bapcor brands, pricing and optimisation. Servicing delays are also likely to be a short-term issue and management expects a mild improvement in the performance of the trade segment.

The company is now operating three stores in Bangkok and a further three are planned for the second half. The stores are establishing relationships with significant chains and this is expected to provide good growth opportunities.

FNArena's database shows four Buy ratings for Bapcor. The consensus target is $6.99, signalling 17.2% upside to the last share price. This compares with $7.44 ahead of the results.

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