Bapcor Blows Them Away

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A spectacular trading update from Bapcor has brokers scrambling to upgrade forecasts, while suggesting the story is not a temporary one

-Strong sales growth and strong margins
-Upside drivers still in place
-Plenty of M&A opportunity

By Greg Peel

Heading into yesterday’s guidance upgrade from automotive aftermarket specialist Bapcor ((BAP)), the six brokers covering the stock on the FNArena database all held Buy or equivalent ratings. They have been duly rewarded.

The auto aftermarket, which includes parts, accessories, equipment and services, has been a solid covid winner post the early lockdowns in Australia and this was not obvious to the market at first. When Bapcor’s suite of stores reopened, demand went haywire.

Aside from simple pent up demand from when stores were mandatorily shut, Bapcor’s sales have soared on covid-inspired lifestyle changes. More Australians are driving to work and avoiding public transport. Many chose to take a road trip within their state once allowed, given border closures. State borders are now reopened, but as this week has shown that’s a dubious situation so it might be safer to stick to car travel rather than risk flying interstate.

In the uncertain economic outlook, Australians have preferred to buy cheaper used cars rather than new. All of the above has led to increasing demand for Bapcor’s businesses.

Business all but went to nought in March-April but as restrictions eased, sales bounced back hard. The initial assumption was this bonanza would not last, merely reflecting aforementioned pent up demand. But yesterday management revealed retail sales are tracking 40% growth year on year in FY21 to date.

To that end, management has issued first half guidance of 25% sales growth and 50% profit. No full year guidance at this stage given ongoing uncertainty, rather this will be provided at the end of the first half. The gap to profit from sales indicates remarkable operating leverage and better than expected margins.

There are a couple of catches. Margins have been boosted by lower marketing spend and less spending on employee travel. These are assumed to rise back again as the year progresses. However Macquarie expects Bapcor can continue to drive margin improvement through procurement, pricing management, own-brand expansion and operating efficiencies.

And a lower interest cost is expected to be sustained for some time. But there are a few headwinds, including increased freight costs, supply delays and inventory scarcity in a world still ravaged by the virus. And a rising Aussie doesn’t help.

Not a flash in the pan

While all agree retail sales growth will ease back from spectacular highs, brokers see only flat growth in the second half rather than any great reversal. Trade demand has recovered more slowly than retail, and provides 80% of earnings. Trade is a structural story, suggests Credit Suisse, given do-it-yourself mechanics is has its limits in today’s vehicles. Other brokers concur.

Morgans believes increased car usage and elevated used car sales, increasing the average age of Australian vehicles, will provide lingering demand tailwinds for auto aftermarket activity over periods to come.

Further to margin support, Bapcor is in the process of building a new distribution centre in Victoria which is expected to be ready for handover next year and fully transitioned in FY22.

Thanks to solid organic growth, Bapcor has a balance sheet champing at the bit to be deployed, especially in the truck part market the company has moved into. This market remains highly fragmented and full of opportunity.

Organically, Bapcor is planning significant store rollouts for both Trade and Autobarn, UBS notes, while Morgan Stanley highlights Midas as the next area that could offer a step-change in performance.

For investors still uncertain as to whether 2021 should be a year to be defensive or to persist with growth, Bapcor is a rare beast that offers both, Citi suggests, and the broker’s not alone. Analysts have rushed to upgrade earnings forecasts, but consensus has it they will likely need to be upgraded again.

As noted, Bapcor attracts six from six Buys in the FNArena database. The target range is very tight, from $8.55 to $9.00, for an average of $8.72. That suggest 12.7% upside form the latest trading price.

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