Vehicle Servicing Underpinning GUD Holdings

This story features G.U.D. HOLDINGS LIMITED. For more info SHARE ANALYSIS: GUD

A soft and volatile consumer environment has prevented GUD Holdings from issuing specific FY21 guidance but the outlook for automotive aftermarket revenue is robust.

-Strength of demand during June and July likely to subside
-GUD Holdings relatively insulated amid volatile consumer sentiment
-Gross margins likely to remain under pressure in FY21
 

By Eva Brocklehurst

Sales of automotive products held up in June and July, providing a significant benefit to GUD Holdings ((GUD)), but this is expected to moderate as government stimulus measures are adjusted through FY21 and pent-up demand declines.

No guidance is provided at this point for FY21 but automotive revenue in the year to date is up in double digits, which is likely to be a function of strong end-markets and some re-seller restocking.

The FY20 results reflect the strength of the company's brands, hence brokers assess the business is resilient despite a softer consumer environment. The second half was significantly affected by the pandemic and included inventory impairments.

Operating cash flow was strong and ahead of guidance but management remains cautious, believing the current environment is too volatile, and will offer a further update at the AGM in late October.

The strength of demand observed during June and July is likely to subside, brokers agree, and superannuation withdrawals are likely to ebb after the September quarter, which may also affect demand for automotive services.

Yet the automotive aftermarket has a major positive impetus, UBS points out, amid improving domestic mobility, the increasing age of average vehicles and the pivot to repairing from replacing vehicles. The reason is there is more wear and tear on older vehicles and these are more likely to be serviced at local workshops.

Citi agrees trading down by consumers could actually benefit the company and, should consumers shift to independent workshops from original equipment manufacturers for servicing, this would further underpin the company's brands.

Despite current growth rates being clearly unsustainable, Credit Suisse agrees macro drivers over the next 18 months remain very supportive. This includes low new car versus used car sales, low fuel prices and restrictions around aviation and public transport.

Macquarie also envisages scope for unit and revenue growth in the Davey (pumps) segment, with a continuation of encouraging demand in Australia and the potential recovery in export markets. A better contribution is likely in FY21.

This all signals GUD Holdings should be relatively insulated in terms of the current volatility in consumer sentiment. UBS forecasts a 3% three-year compound growth rate is readily achievable, before acquisitions.

Citi downgrades to Neutral from Buy, believing GUD Holdings will be challenged to generate more than mid single-digit revenue growth over the medium term without acquisitions, or an export strategy of significance.

Credit Suisse also has concerns over valuation, preferring to buy the stock at a lower entry point. On the other hand Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, retains a Buy rating and $14.20 target, envisaging 21% upside potential in the stock.

Margins

Gross margins are expected to remain under pressure in FY21 and a flat earnings margin for the automotive segment likely, Credit Suisse asserts, purely on volume growth assumptions and associated fixed cost leverage.

The broker also notes potential for re-stocking activity in the first half. Credit Suisse forecasts 6.5-7.0% growth in sales for automotive parts across FY21-22, with the Ryco brand remaining the driver.

Citi expects gross margins will be adversely affected as the company incorporates new rebate rates and was surprised that rebates were trending higher, given many of the brands are leaders in their respective categories. The broker would prefer the company held the line more firmly in this regard.

Moreover, Citi suspects acquisitions could take time to materialise, given the company's cautious approach. However, there is a $22.5m in additional short-term debt facility which would avoid delays should an opportunity arise.

Results

Underlying earnings (EBIT) was $80.7m, down -9.2% on FY19, affected by the aforementioned issues. The final dividend of $0.12 represented a second half underlying pay-out ratio of 51% and the dividend reinvestment plan has been reinstated.

The EBIT margin contracted -210 basis points while operating cash flow increased 29% to $48m. The decline in second half sales was less severe than Credit Suisse anticipated but this was partially offset by the weak gross margins.

In turn, margin weakness was attributed to currency movements in the second half and a negative mix within the water segment. Underlying earnings fell -8% in the water division with the revenue affected by lockdowns in New Zealand and France, combined with a lower volume and sales mix that compressed margins.

FNArena's database has five Hold ratings with a consensus target is $11.65 that suggests 4.6% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 3.7% and 4.6%, respectively.

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