Australia | Apr 14 2022
This story features G.U.D. HOLDINGS LIMITED. For more info SHARE ANALYSIS: GUD
Following reaffirmed guidance and upbeat commentary brokers remain Buy-rated for G.U.D. Holdings.
-GUD Holdings aims to lead the EV aftermarket
-FY22 earnings guidance maintained
-Elevated inventory and future price rises assist
-AutoPacific Group business: the jewel in the crown?
By Mark Woodruff
While five years of share price stagnation will have been frustrating for longer-term investors in GUD Holdings ((GUD)), commentary at the recent investor day may be cause for optimism.
The five brokers within the FNArena database certainly remain positive. All have Buy or equivalent recommendations with an average 12-month target price of $15.65, which suggests 33.1% upside to the latest share price.
The company’s Automotive segment represents the vast majority of earnings and distributes spare parts under brands such as Ryco, Wesfil and Narva. Water products are sold primarily under the Davey brand.
In recent times, management has been on the acquisition trail and purchased AutoPacific Group to strengthen its exposure to the growing 4WD and trailer accessories segment, while Vision X was snapped up to provide exposure to automotive and commercial lighting.
Notably, these two companies reduce overall group exposure to internal combustion vehicles, helping to offset the threat from electrification for some existing product lines, notes Morningstar.
Macquarie highlights this point further by noting the company is becoming increasingly powertrain (source of propulsion) agnostic. Automotive revenue is now comprised of 40% 4WD accessories, 30% power and lighting, 20% powertrain and 10% under-car.
Management aims to be a leader in the electric vehicle aftermarket, estimated to be worth around $50m in Australia and New Zealand. The company currently captures only $1m of revenue from this source, which is forecast to grow to more than $1bn by 2030.
Looking more broadly, Wilsons believes underlying industry trends remain favourable, and GUD Holdings continues to demonstrate effective margin and inventory management. There’s also considered to be mounting evidence of successful strategy execution by management.
At its investor day, the company issued a trading update which aligned with the analyst’s recent industry feedback. FY22 earnings guidance of $155-160m was reaffirmed, and included around six months contribution from AutoPacific Group and seven months from Vision X.
Inventory management and future price rises
Two positives emerged from the company’s trading update, according to UBS.
Firstly, management alluded to price rises in the first half of FY23 to offset inflationary pressures.
Also, elevated inventories have helped to insulate the business. Despite China lockdowns and the Russia/Ukraine crisis, freight, supplier costs and stock availability were all in line with management’s expectations. In a surprise for the analyst, the company intends to reduce some inventories after the third quarter, which should support cash generation.
Citi disagrees with management’s outlook for inventory and sees potential for levels to remain elevated for longer than expected and remain dependent upon the duration of China lockdowns.
The Vision X acquisition was incorporated into the company’s Brown and Watson International (BWI) business. Wilsons feels an internalisation of some BWI product manufacturing is possible, in light of significant spare manufacturing capability at the Vision X facility in South Korea. It’s thought this would both improve margins and enhance the competition position of the business.
The analyst also sees a material opportunity to leverage the combined customer base of BWI and Vision X to increase global product sales across the Automotive Lighting and vehicle Power Management category. Wilsons, not one of the seven brokers updated daily in the FNArena database, retains its Overweight rating and $14.90 target price.
Meanwhile, Macquarie notes the business opens up the US and Europe markets and feels it is a key plank to help the company grow a global leadership position in Automotive Lighting. There’s also thought to be substantial capacity in the Vision X manufacturing facilities for future expansion options.
Citi believes the AutoPacific Group business is now the jewel in GUD Holding’s crown.
Positives include strong original equipment manufacturer (OEM) relationships, which mean the business sometimes obtains computer-aided design (CAD) data two years prior to vehicle launch, allowing product availability at the launch date. The business also has manufacturing facilities in Australia and Thailand, which provides cost competitiveness and mitigates against disruption.
AutoPacific Group has a dominant market share in towing, according to Macquarie, and continues to leverage its OEM relationships to expand into other categories. These include Functional Accessories, Trailering and Cargo Management.
Structural growth in demand continues for 4X4s and SUVs, according to Wilsons. Additionally, there’s thought to be an increasingly strong moat around the Towing Product segment and significant growth opportunities in Functional Accessories.
One potential negative of the acquisition, according to Citi, is a greater company-wide exposure to a consumer slowdown should higher inflation and interest rates take hold. The AutoPacific Group’s products are considered (arguably) more discretionary than many of the company’s legacy businesses.
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