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.
A formal plan for rolling out in Thailand is yet to be confirmed, although Bapcor is targeting 60-80 stores and has stated that it will not require an acquisition. Bapcor is the largest chain delivering similar services in Thailand and this will be a greenfield expansion.
A new distribution centre planned for Tullamarine (Victoria) is expected to enhance efficiencies. Credit Suisse upgrades the FY22 outlook based on the formal disclosure of the distribution consolidation economics. The upfront investment is expected to occur in the first half of FY21 with benefits accruing in FY22. Bapcor closed two stores in the first half and some franchisees remain on credit restrictions, impacting sales performance.
All up, Morgans likes the status of a relative safe haven in a volatile retail sector while Macquarie anticipates the stock's -10% discount to the market is likely to close. FNArena's database has five Buy ratings. The consensus target is $7.81, suggesting 12.0% upside to the last share price.
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