Treasure Chest | Jul 15 2020
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Citi asserts the automotive aftermarket stocks are worth considering in the current climate and other brokers agree the sector enjoys tailwinds in the current economic environment.
-Bapcor a top pick across FNArena database in the automotive aftermarket
-ARB benefiting from outperformance in specialist vehicles in Australia and US
-Downside risk for GUD Holdings/Super Retail could stem from more widespread lockdowns
By Eva Brocklehurst
In the current difficult environment, the automotive aftermarket is worth considering, Citi asserts. Other brokers agree the sector, generally, has tailwinds, given a preference for driving as opposed to public transport and an emphasis on domestic travel.
Moreover, the non-discretionary nature of automotive parts has been highlighted by recent updates from the likes of Bapcor ((BAP)) and Super Retail ((SUL)) as well as the data revealing increased use of personal vehicles.
Australian traffic data has signalled personal vehicle use has continued to climb as consumers hesitate to use public transport during the pandemic, hence a flow on to trade in car parts and servicing. Meanwhile, a shift towards SUVs and 4WDs is likely to benefit ARB Corp ((ARB)), in Citi's view.
Bapcor remains Citi's top pick in the small automotive sector segment as it sells automotive products that are less discretionary compared with ARB and Super Retail. The company also has long-term growth strategies with a roll-out in Thailand and private-label expansion.
This view is shared by other brokers on FNArena's database and the stock has seven from seven Buy ratings and a consensus target of $6.92 that signals 24.0% upside to the last share price. Morgans expects, while consumer sentiment may be distorted because of the extent of government stimulus, the company's market should prove resilient.
Credit Suisse, too, believes Bapcor is geared for a re-rating and the months ahead will be favourable for automotive businesses.
Ahead of the financial results, Citi is forecasting 6% sales growth in the first half for ARB, underpinned by the extension of the Commonwealth government's accelerated depreciation scheme to December 2020 and superannuation withdrawals. While ARB is arguably the highest quality company in the broker's automotive coverage, and can benefit from outperformance in specialist vehicles in Australia and the US, it is also the most expensive.
Citi considers the multiple is appropriate at 26x FY21 PE but momentum into 2021 following conclusion of JobKeeper and instant asset write-offs remains uncertain. This is also in keeping with the other three brokers in the database which have Hold ratings while a $17.58 consensus target signals -2.3% downside to the last share price.
On balance, Citi assesses upside risk to FY20 forecasts for both GUD Holdings ((GUD)) and Super Retail amid like-for-like sales momentum, although downside could emanate from the increased likelihood of stricter lockdowns in Victoria and NSW.
Citi has the lone Buy rating (amid four Hold ratings) on the database for GUD Holdings and notes one of the company's major customers, Bapcor, provided a better-than-expected trading update recently that emphasised the defensive nature of automotive parts. The consensus target for GUD Holdings is $10.44, signalling -7.6% downside to the last share price.
Macquarie, while acknowledging the highly defensive characteristics of the company's automotive business, believes a reinstatement of lockdowns in Victoria underscores renewed risk. Moreover, the stock has rallied from the lows in March.
Credit Suisse suspects material de-stocking in automotive brands may have played out across the June quarter, and the company's brands such as Ryco and BWI remain the single largest drivers of earnings.
Citi adds, while GUD Holdings has a strong presence in filters & electricals, there are opportunities to strengthen other categories such as suspension, oil, cooling and engine parts through acquisitions. There is sufficient liquidity to support opportunistic acquisitions in the current weak economic environment, UBS agrees.
Amid six Buy ratings for Super Retail, UBS stands out with a Neutral rating, believing the catalysts are limited for this business at present and the looming end to the government stimulus creates uncertainty going forward. The consensus target is $9.26 which signals 18.1% upside to the last share price.
The company recently announced a $203m rights issue to shore up its balance sheet and Citi believes this equity raising is a positive step as it removes the excess leverage relative to peers. The broker accepts the recent trading update was mixed, given the company's differing businesses, but envisages upside to the FY20 consensus net profit forecasts of $126m.
This is attributed to resilient sales at Supercheap Auto, which enjoyed like-for-like sales momentum over the two months up to May 23 that is likely to have continued in June. While the company has emerged from the nationwide lockdowns relatively unscathed, Morgans assesses the performance would have been even better but for more stringent restrictions in New Zealand.
The capital raising is dilutive to FY21 earnings but Morgans believes the stock deserves a higher rating and recently upgraded to Add. Credit Suisse also finds reasons to be bullish about Super Retail in 2021 because of the likelihood of a substantial boost to domestic leisure expenditure, while the company has other strong brands in relevant markets as well as a robust online platform.
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