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GUD Holdings: Upgrade Pending?

Australia | Feb 09 2022

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

After a solid first half result, brokers suggest GUD Holdings’ full-year guidance seems too conservative and expect an upgrade to be around the corner.

-Earnings beat for GUD Holdings, driven by strong margins
-Business momentum remains robust
-Brokers anticipate a guidance upgrade will be forthcoming

By Greg Peel

GUD Holdings’ ((GUD)) first half numbers showed a beat on broker forecasts for revenue but a substantial beat for earnings, driven by a surprise increase in margins. When all about are suffering margin stress from supply shortages and delays, higher labour costs and freight charges, GUD managed to go the other way.

GUD is a manufacturer, importer, distributor and seller of automotive parts in Australia, New Zealand, France and the US. The business comprises of two divisions – Automotive and Davey.

Automotive offers heavy-duty filters for cars, trucks, and agricultural and mining equipment, and fuel pumps and associated products for the automotive after-market. Davey provides pumps and pressure systems for household and farm water, water transfer pumps, swimming pool products, spa bath controllers, and water purification equipment.

GUD recently made two substantial acquisitions, of AutoPacific Group and VisionX, which have expanded its range of auto part offerings. The acquisitions required a raising of both capital and debt.

Suffice to say, Auto is GUD’s shining star, while Davey has long struggled. The auto aftermarket has surged in the years of covid as Australians have been forced to take to the road rather than the air for holidays and weekend escapes. Water systems not so much.

Winning Strategy

That said, the clue to GUD’s margin success lies in a big miss of broker forecasts of cash conversion, which came in at 63% compared to 91% a year ago. To combat shortages and freight delays, GUD embarked on a significant inventory build, allowing the company to maintain strong customer service levels, Macquarie notes, that helped drive market share gains. The broker expects cash conversion to recover in the second half.

But of all the surprises, the biggest for brokers was no change to full year organic growth guidance (not counting the recent acquisitions), despite clearly solid momentum in the auto business. Including acquisitions, UBS notes weaker than expected guidance for AutoPacific reflects a skew to the second half of 2022 (ie first half FY23) as the new Ford Ranger models are not due until April or May.

Brokers agree conservative guidance reflects some volatility in trading conditions and increased costs, and no doubt simple caution regarding what further covid impacts may lay ahead. Yet solid margins imply price rises implemented in October have “stuck”, and another round is expected this month.

Management noted activity started to pick up further in late January and is much stronger again in February to date.

Upgrade Foreseen

To that end, brokers believe guidance is simply too conservative. The company will hold an Investor Day on April 8 and Credit Suisse tips this date for an upgrade announcement.

Aside from organic conservatism, brokers note the two major acquisitions provide GUD with, conversely, greater exposure to the 4WD market (which in particular is going gangbusters) but reduced exposure to internal combustion engines in general, along with a greater mix of internal manufacturing and international growth optionality.

Ord Minnett suggests investors may yet remain cautious following the big acquisitions, which have to be bedded down, and the additional debt brought on to the balance sheet, at least until the company can “prove up” its earnings forecast and provide confidence on margins in the medium term.

Presumably a guidance upgrade will help.

The FNArena broker database shows five from five Buy or equivalent ratings for GUD and a consensus target price of $15.56, up from $14.84 previously, suggesting 27% upside.

Stockbroker Wilsons has an Overweight rating and $14.90 target.

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