Treasure Chest: Expansion Potential For Bapcor

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FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. As households and businesses hold onto vehicles longer in the face of a weak economy, automotive parts supplier Bapcor is likely to be a beneficiary.

-Resilient earnings growth expected beyond the coronavirus disruptions
-Expansion likely from private-label growth, DC consolidation
-Heightened potential for store roll-out in Thailand
 

By Eva Brocklehurst

Bapcor ((BAP)) stands to benefit somewhat from the looming recession, as households and businesses hold onto vehicles longer and move to cheaper independent mechanics from original manufacturer service.

Demand for after-market automotive parts increases substantially with an older vehicle fleet and, considered one of life's essentials, vehicle servicing is likely to be one of the first off the grid as the country's lock-downs are lifted, ahead of other discretionary retail items.

Bapcor also has a number of specific growth factors underpinning its outlook and recently raised $180m to add flexibility and capacity to execute on its growth strategy.

While isolation protocols were implemented across Australasia, the company highlighted its Australian store network remained fully operational and gross margins were steady. Therefore, UBS assesses, beyond the disruptions, the business should be able to deliver resilient earnings growth.

Credit Suisse also notes the business has held up well, in both trade and retail segments. Now that concerns over gearing are not overhanging the stock investors can focus on the prospect of the company being one of the first to benefit from a rebound. Morgans, too, expects the automotive parts sector will recover more quickly than some other consumer-facing businesses as the pandemic passes.

The pandemic is likely to affect short-term margins as non-essential work on vehicles is delayed. Moreover, a need to discount may increase in order to encourage consumer spending after the lock-downs ease, Citi points out.

The company has indicated like-for-like sales declined -12-15% in Australia over the first three weeks of April but, as Credit Suisse highlights, this compares with retail fuel volumes at Viva Energy ((VEA)) being down -30-40% and Transurban ((TCL)) indicating metropolitan traffic was down -40-50%.

Therefore, the business is holding up better than many previously feared, and UBS now assumes revenue will decline -9% in the June quarter, growing at 4% in the second half of FY20. Like-for-like sales are expected to improve from the second half of FY21, although minimal overall growth is anticipated.

Expansion is very likely in the months and year ahead from private-label growth, improved scale and the consolidation of distribution centres. Should Bapcor achieve its 35% private-label target by FY25 this could represent a $21m operating earnings opportunity. Citi considers the target achievable, as two US peers already have higher penetration at around 50%.

In order to expand coverage across the Australian automotive sector, the broker initiates coverage on Bapcor with a Buy rating and $6.00 target and expects compound growth in earnings per share of 14%. This should stem from international expansion, initially Thailand, and margin expansion that is underpinned by private-label growth, consolidation of distribution centres and a turnaround of Autobarn stores.

International Expansion

Citi's analysis of motor vehicle density per trade store in Australasia indicates there is potential for 151-269 Thai stores versus the roll-out target of 60-80, although recently Bapcor indicated it could exceed this. South Korea, Indonesia and Malaysia are also potential markets.

Further afield, Vietnam and Cambodia, while not a significant opportunity for stores, have proximity which may enable Bapcor to leverage its support base in Thailand.

Currently, Bapcor has five stores in Thailand and one procurement office. These are primarily focused on trade but also cater to a small number of retail customers. Citi assumes an earnings target of 10% in Thailand, lower than the current margin of 11.3%. While costs are similar, prices are lower as consumers are more price conscious.

Bapcor has also indicated it has been successful in establishing B2B relationships in Thailand, which Citi considers critical in driving repeat business.

Margin & Cost Savings

An increase in private-label penetration should drive better margins and cost savings should arise from the consolidation of distribution centres and the turnaround of underperforming Autobarn franchises.

Citi assesses the new Melbourne distribution centre, to be completed by December, could result in $10m in cost savings by FY22. The proportion of the company-owned Autobarn stores increased to 56% by the end of the first half and Citi expects ownership will remain a focus,  in order to improve customer experience and brand perception.

Retail and service margins may have bottomed as a result, as a majority of franchise stores that were acquired over FY19 and the first half of FY20 were loss-making because of a lack of investment. Moreover, franchisees purchasing products from outside the group potentially resulted in sub-optimal brands being held in stores.

Vehicle attrition rates are expected to be lower in 2021-23 compared with the average attrition rate over the last five years, because of concerns regarding unemployment in the global economy. New vehicle sales in Australia, Citi calculates, are likely to decline by -10% annually between 2021 and 2023, benefiting Bapcor.

FNArena's database has seven Buy ratings. The consensus target is $5.81, suggesting 21.2% upside to the last share price.

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