Bapcor Defensively Positioned

Australia | Feb 13 2020

After fearing the worst, brokers applaud first half results from Bapcor, which underscore the company's position in a relatively defensive automotive parts industry.

-Competitive environment eases slightly
-Specialist wholesale supported by recent acquisitions
-Price increases in December enable margins to increase in January


By Eva Brocklehurst

Bapcor ((BAP)) exhibited resilience over the first half as promotional activity aided trade sales and the competitive environment eased slightly. Revenue growth was 10.4%, benefiting from a higher mix of company-owned Autobahn stores, while net profit was up 5.1%.

Credit Suisse suspects the market was bracing for a worse result, amid rumours trade earnings would be down and net profit would contract, although when examining the drivers of the growth story nothing has changed.

The “home” brand is now occupying 24% of the business in Australia and 32% in New Zealand, with the target of 35% across Australasia now in sight. Online sales doubled in retail trade, underpinned primarily by Click & Collect, which Macquarie assesses is an indication the majority of customers still prefer to pick up products for immediate use rather than have them dispatched.

The trade division sustained very strong same-store sales growth in response to the company's promotional campaign. Trade margins did decline in the first half, to 13.5%, reflecting competitive pressures, which Credit Suisse suggests were partly driven by the market and partly self-inflicted. However, the market appears to have expected an even more detrimental outcome. Remediation will be the focus for the second half.

Where Morgans previously envisaged downside risk to forecasts, the trajectory of margin recovery in the second half now presents some solid upside risk. Admittedly, growth has slowed from previous heady levels but the outlook is still intact.

Moreover, a price increase appears to have stuck and this means margins have increased in January, signalling to brokers a more rational competitive environment and favourable industry structure.

The specialist wholesale division was supported by recent acquisitions, with revenue of $235.4m, up 20%. Growth was primarily supported by the inclusion of Don Kyatt. The company added three new trade stores in the half, including two greenfield operations.

Bapcor has also pointed to strong growth in auto electrical and engine management. Inter-company sales grew 10% and form a growing portion of revenue as part of the strategy to support trade and retail business. UBS highlights the multiple growth and cost cutting options and expects there could be significant upside in Asia for the company.

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