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Vision X To Propel Growth For GUD Holdings

Australia | Nov 02 2021

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

GUD Holdings has acquired Vision X, a specialist vehicle lighting business, that will drive expansion across North America and Europe.

-Vision X will reduce exposure to internal combustion engines
-GUD Holdings to instigate second round of price increases from third quarter
-Demand resilient throughout the September quarter despite lockdowns


By Eva Brocklehurst

GUD Holdings ((GUD)) is extending its foothold in the global automotive parts industry, acquiring Vision X, a specialist lighting business.

The acquisition is consistent with the company's strategy of reducing exposure to internal combustion engine (ICE) parts and providing growth for the medium term. Vision X will provide a platform for the BWI division, which supplies chassis, suspension and brake components, to expand into North America and Europe.

The cost of the acquisition is -US$53m plus an earn-out, taking the total cost to -US$71m. Macquarie finds it compelling, both for the accretion provided over the short term and potential synergies over the longer term.

The business also has internal manufacturing capabilities. Over the medium term, GUD Holdings expects to grow Vision X in Australia and leverage it for BWI growth in the US and Europe, the two largest vehicle markets.

Citi agrees this is a strategically sound acquisition, providing the way to expand beyond Australasia and Vision X should allow GUD Holdings to reduce its reliance on legacy automotive customers, which have increased bargaining power through private-label strategies.

GUD Holdings is acquiring Vision X at an enterprise value/earnings (EBITA ) of 6x. Citi considers this reasonable, given it is a lower multiple compared with that paid for the acquisition of BWI and AMA Group's ((AMA)) ACAD (Automotive Components and Accessories Division). Yet, Vision X will also provide entry to international markets.

This is actually a bolt-on acquisition, with GUD Holdings having capability already in the automotive electrical and lighting category. Citi does not include synergies in its forecasts because of the lack of information regarding the size of the opportunity and the time to deliver.

Still, the customer base is likely to become more diverse, as around 80% of Vision X customers are new to GUD Holdings. Leverage remains comfortable, which signals to the broker GUD Holdings can pursue further acquisitions over the medium term should the opportunity arise.

Earnings from Vision X have grown sequentially since FY19 and the company generates 65% of revenue from industrial, fire, emergency and motorcycle categories. The main competitors in the US are Rigid Industries, Baja Design and Spyder Auto.

GUD Holdings points out margins are healthy, broadly in line with its legacy automotive business, which had an average EBIT margin of 29% from FY15-19.

The company has guided to FY22 earnings (EBIT) of $112-116m on the back of resilient demand as well as pent-up orders as the population gets moving again. Acquisitions made in FY21 are performing in line with expectations and Davey (water products) revenue is up strongly along with export demand.

UBS also notes a second round of price increases for the larger automotive businesses will be effective from the third quarter and offset cost inflation. Still, the broker warns, a -$22m headwind is expected from surging freight costs, supplier price increases and the roll of of JobKeeper. This should be offset by the benefit from higher FX and the 4% price increases from September.

The broker assesses the supply chain is difficult to manage as shipping and production times are worsening, compounded by manufacturing disruption in China. On the other hand,GUD Holdings has high inventory levels and appears to be managing its supply chain to date.

Valuation Discount

Citi calculates GUD Holdings is trading at a -27% discount to Bapcor ((BAP)), above the long-term average of -10% and considers this excessive as the former has a higher FY22 dividend yield and is reducing its risk through acquisitions.

Macquarie, too, finds the valuation is attractive as GUD Holdings is trading at around a -30% discount to global peers. Throughout the first quarter the broker notes demand has been resilient despite the lockdowns.

FNArena's database has five Buy ratings with a consensus target of $13.67 that suggests 12.4% upside to the last share price. The dividend yield on FY22 and FY23 forecasts is 4.9% and 5.1%, respectively.

See also, Confidence Increases In GUD Holdings on October 13, 2021.

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