GUD Holdings Expands In Vehicle Accessories

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

In a much-anticipated acquisition, GUD Holdings has committed to the expansion of its automotive business with the purchase of ACAD from AMA Group, now considered a takeover target

-Additional investment by GUD Holdings required
-AMA Group to focus on panel repair
-AMA Group now a takeover target
 

By Eva Brocklehurst

GUD Holdings ((GUD)) is diversifying, obtaining exposure to a range of brands in the fast-growing vehicle fit-out category, comprising Custom Alloy, CSM Service Bodies and Barden Fabrications, to name a few.

The expansion stems from the purchase of the ACAD (Automotive Components & Accessories Division) business from AMA Group ((AMA)) for $70m. This is a bolt-on acquisition which the company expects will be accretive in FY21 in the mid single digits, before synergies.

GUD Holdings has diversified with the acquisition, obtaining exposure at a lower multiple from a distressed vendor, Credit Suisse assesses, and can add material value in terms of distribution and manufacturing know-how. Incorporating ACAD drives 4-5% earnings accretion to estimates and the broker upgrades to Outperform from Neutral.

GUD Holdings will fund the deal by an institutional placement of $55m and share purchase plan of $15m. UBS considers ACAD a strong strategic fit that provides benefits from diversity and a mid-high teens return profile over the medium term.

Ord Minnett considers the acquisition price reasonable but remains cautious about the near-term returns, anticipating additional investment will be required given AMA Group's financial stress.

Wilsons agrees with this assessment, noting the ACAD earnings margin of 11% indicates significant room for improvement, particularly with the smaller brands.

The broker suspects a fragmented nature of the different brands, locations and networks will require more management resources to execute effectively and capture synergies.

Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, has a Market Weight rating and $12.10 target for GUD Holdings. GUD has two Buy ratings and two Hold on the database. The consensus target is $12.95, signalling 6.5% upside to the last share price.

AMA Group

AMA Group will now use the proceeds to retire debt and focus on its panel repair opportunity. The sale excludes the ACM Parts and Fluiddrive businesses. UBS assesses the multiple received was on the low side but the transaction made sense nonetheless.

Bell Potter concludes the sale is a positive as it reduces net debt to below $200m. The company is now a pure operator in vehicle panel repair and this makes it more attractive from a takeover perspective.

Bell Potter updates AMA forecasts to account for the sale and reduces the relative discount applied as well as the weighted average cost of capital, given the strengthened balance sheet. A Buy rating and $1 target are the result.

Proceeds will lower AMA's adjusted leverage ratio to the low-mid 2.0x level, providing a safety margin against the covenant of 3.25x, Wilsons calculates. The broker envisages the risk/award balance is neutral and retains a Market Weight rating with a $0.73 target.

The balance sheet and capital raising risk are materially reduced and now the company can seek acquisitions in panel repair. First half numbers should be propped up by JobSeeker, offset by the slowdown in Melbourne.

Moreover, Moelis notes the company expects a return to pre-pandemic volumes by the end of December and will complete the paint roll-out for Capital SMART by the end of the year. Still, with the share price appreciating 24% since the beginning of October the broker maintains a Hold rating and an $0.83 target.

To reflect the divestment Moelis reduces operating earnings estimates for FY21 and FY22 to $72m and $86m, respectively. The broker assumes a net increase of 20 panel shops per annum from FY22 are required to deliver the company's target of $100m per annum revenue via acquisitions.

UBS believes the second half will be critical to assessing the margin potential of panel repair along with the renegotiation of pricing arrangements with major customers. As the valuation remains appealing, the broker retains a Buy rating with an $0.86 target.

Canaccord Genuity suspects investors were left hanging on for more "granular" information and maintains a Buy rating with a $0.95 target. The broker is mindful that, while operations are now at pre-pandemic levels, Victoria is still emerging from the lockdown.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms