Bapcor Racing Ahead In Favourable Conditions

Australia | Oct 13 2020

Bapcor is racing ahead, delivering strong vehicle parts sales, and envisaging plenty of opportunity for industry consolidation.

-Factors fuelling demand could not be more favourable
-Retail segment strong but likely to have peaked
-Material opportunity for consolidation in truck parts


By Eva Brocklehurst

Bapcor ((BAP)) is travelling well, delivering a positive trading update that reflected strong industry conditions for car parts. Furthermore, changes brought about by the pandemic are likely to persist for longer than many expect and this plays to the company's advantage.

Credit Suisse considers the factors fuelling domestic consumption could not be more favourable. These include weak new car sales, avoidance of public transport/increased use of private vehicles and restrictions on international aviation.

The broker expects consumer demand for the company's consumables will remain heightened over the next 18 months, and places Bapcor at the head of those retailers likely to experience organic growth above trend.

Moreover, the company's balance sheet is healthy and provides options for growth and consolidation. While the broker expects retail business will eventually soften it will likely be from a much higher base.

Morgan Stanley expects that the second half will be "choppy" but agrees strength in market demand will provide upside to gross margin assumptions as there is very little need for aggressive discounting.

UBS anticipates growth will moderate from the second quarter of FY21 but increased vehicle utilisation and a shift towards repairing rather than replacing should underpin the business and support a high rate of growth.

Sales Trajectory

Trade like-for-like sales were up 7.7%, or up 17% outside of Victoria. Retail was up 36% and New Zealand up 4%. Citi believes like-for-like sales in the retail segment have peaked, assessing sales over August and September represented a slowdown relative to July.

Going forward, increased use of motor vehicles domestically over the summer holidays and pent-up demand following the easing of lockdown restrictions in Victoria are likely to provide further momentum for trade sales, in the broker's view. The main downside risk is potential that higher unemployment causes consumers to delay servicing their cars.

The stock provides a quality exposure to defensive end markets and there is a high degree of earnings visibility, in Macquarie's view, with plenty of opportunity and balance sheet capacity to execute on organic growth strategies as well as pursue any M&A.

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