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Morningstar | Bapcor Firing on all Cylinders During Fiscal 2018, and Growth Outlook Remains Strong

Bapcor reported a solid fiscal 2018 result, with underlying net profit after tax increasing by over 30% to AUD 87 million, albeit in line with our expectations. The performance was buoyed by the first full-year contribution from the recently acquired New Zealand business, which if excluded would've seen group earnings grow by around 15%, impressive nonetheless.

We maintain our AUD 7.00 per share fair value estimate, and our narrow economic moat rating. We believe shares in Bapcor are fully valued at the current market price. The board declared a final dividend of AUD 8.5 cents per share, taking fiscal 2018 full-year dividends to AUD 15.5 cents per share (fully franked), up almost 20% on the prior year and equivalent to 50% of underlying EPS in line with our expectations.

Management guided to underlying net profit growth of between 9% and 14%, and we are projecting the higher end of the range. We forecast the company to continue delivering low-double-digit earnings growth for the next five years. The key drivers of our projections are ongoing expansion of both the retail and trade network, collectively generating around three fourths of group revenue, steady growth in same-store sales, growing contribution from the specialist wholesale business also helping in growing private label penetration and consequently margins.

Based on our projections, the trade segment should continue growing revenue at approximately 10% per year on average, for the next five years. The ongoing network expansion is a key component of the growth outlook, and we expect the company to continue consolidating the fragmented trade space and rollout an additional 10-12 stores per year (compared with nine in fiscal 2018), taking the network to around 230 stores by fiscal 2023. Same-store sales growth was maintained at just over 4%, and we expect this pace is sustained given the steadily growing vehicle fleet, modest pricing increases, and increasing average basket size. Another key factor underpinning our thesis is the expected margin expansion in the core trade segment, which continued to play out in fiscal 2018. Trade EBITDA margins expanded by 80 basis points to 14.4%, and we forecast these to reach 16% within the next three years by virtue of operating leverage, increasing penetration of own brands and growing scale. Private label share of trade sales doubled during the past few years to 23% in fiscal 2018.

Bapcor's strategy of buying back underperforming franchise stores is proving fruitful, reflected in almost 5% growth in company-owned Autobarn stores versus just over 1% for the franchises. Currently around 38% of Autobarn stores are company owned (compared with 25% last year) and while this had the forecast dilutive effect on EBITDA margins, which fell by 50 basis points to 12%, longer term, the strategy makes sense. The company added six retail stores in fiscal 2018 and is aiming to grow the network to 200 stores by fiscal 2023 from the current 128, and the majority of these will be corporate stores. As the mix shifts towards corporate progresses, we expect margins to contract by around 2% cumulatively to 10% by fiscal 2023, although the increasing private label penetration, and growing scale should support a stabilisation at this level, offsetting pressure from online competition. Within retail, own brand sales only represent 20% of sales, and while this was an improvement on the 16% last year, the firm remains considerably lower than rival Super Cheap Auto which has around 44% private label penetration. Management is targeting 35% private label sales within retail, which we believe is still conservative given peer levels, and an attractive opportunity.

The specialist wholesale business is becoming a more meaningful contributor, generating around 25% of group earnings. The segment has a healthy pipeline of products and if can leverage Bapcor's retail and trade distribution network. This should support at least mid-single-digit revenue growth, while supporting margin improvement in the other divisions.

The firm's financial health strengthened, as net debt fell to below 2 times EBITDA, from over 3 in fiscal 2017. This reflects the divestment of noncore assets which liberated almost AUD 100 million in funds, along with strong operating cash conversion which remains at close to 100%. The firm can comfortably sustain a dividend payout ratio of around 50% of underlying earnings, which provides extensive headroom to undertake the network expansion, and incremental product acquisitions within the specialist wholesale division.