Australia | Oct 20 2021
This story features BAPCOR LIMITED. For more info SHARE ANALYSIS: BAP
Bapcor is expected to be a strong recovery story once lockdowns are fully lifted in NSW and Victoria and the population can go driving again.
-Main risk to Bapcor's outlook is more lockdowns or softening of demand for car servicing
-Margin recovery expected through supply chain efficiencies
-International and company's private-label expansion should provide further upside
By Eva Brocklehurst
Bapcor ((BAP)) has a highly defensible business with potential to grow and improve margins. Brokers have made this assessment, following a "soft" first quarter update, but after allowing for the significant impact of lockdowns in NSW and Victoria.
The company re-confirmed FY22 guidance at its AGM and is confident there should be no further significant lockdowns in the second half. The first half is expected to be softer, nevertheless.
Morgans expects the first half result will be materially below the prior corresponding at around -15%, stemming from higher overheads, duplication costs and material operating de-leverage in the first quarter.
Still, the broker looks past this and believes improving conditions and efficiencies will come to the company's aid, along with longer-term geographic expansion and acquisitions.
The first half is still tracking ahead of Macquarie's expectations, as an even greater impact from the lockdowns in NSW/Victoria was expected. Around 70% of the store network was affected by lockdowns while those areas that avoided lockdowns performed ahead of expectations.
Across the business, trade revenue was up 2%, retail/Autobahn revenue down -12% and specialist wholesale revenue up 7%. Given the significant disruption caused by lockdowns, the main risk to the broker's view is… more lockdowns, and any softening of demand in the vehicle aftermarket.
Citi forecasts trade and specialist wholesale sales to accelerate to growth of 11% and 9%, respectively, over the second quarter as demand for servicing increases and consumers take more domestic holidays.
First quarter revenue was flat yet a recovery was evident after July revenue was down -5%. The highlight were trade sales, while wholesale was also robust. This offset weaker NZ and retail sales growth.
This week's trading update was slightly ahead of Ord Minnett's expectations and further improvement is expected to come with the re-opening of NSW and Victoria. The broker notes a strong ongoing demand for the core Burson business and margins should improve through higher private-label sales.
Bapcor expects gross margins in trade and retail, which were down -50 basis points on FY21, will revert as lockdowns are lifted. UBS concurs, given there was limited promotional activity and price increases to offset cost inflation.
Citi also notes margin headwinds are occurring amid duplication of costs associated with the transition to the Victorian distribution centre. Nevertheless, over the medium term margin expansion can occur through supply chain efficiencies.
UBS expects growth to accelerated as the five-year expansion strategy unfolds. There should be pent-up demand, particularly for mechanical services as more private vehicles take to the road and the average age of the fleet rises.
The broker points out petrol and motor vehicle service expenditure intentions over the next twelve months are among the most elevated categories in its recent Australian consumer survey, although the broker acknowledges there may be some uncertainty around the sustainability of automotive equipment sales.
Morgan Stanley agrees Bapcor has a buoyant outlook, given a robust used car market, the preference for private against public transport and emphasis on domestic holidays. There is also upside to come from the company's distribution centre consolidation and private-label expansion.
Rolling out stores, private-label penetration and international expansion are highlights for Citi too. New car supply issues are also resulting in consumers holding onto their current cars for longer.
Morgans remains cautious but acknowledges the resilience of the business and the potential that exists once operating conditions normalise. Sufficient upside has emerged for the broker to upgrade to Add.
There are seven Buy ratings on FNArena's database for Bapcor. The consensus target is $8.91, which suggests 9.8% upside to the last share price.
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