EUR 850.00 For Business Accounts Only

Morningstar | Market Share Gains and Resilient Vehicle Maintenance to Drive Bapcor's Top Line Growth. See Updated Analyst Note from 06 Aug 2018

Narrow-moat Bapcor is set to deliver a strong fiscal 2018 result, and we expect net profit growth of around 30%. A key driver of growth will be the first full-year contribution from recently acquired Hellaby Automotive, which will account for around 20% of fiscal 2018 group earnings. Excluding Hellaby, the firm's organic earnings growth should remain solid at approximately 18%, the majority driven by ongoing market share gains and the continued store rollout. We maintain our AUD 7.00 per share fair value estimate, and the stock is fairly valued. The stock currently trades at around 23 times fiscal 2018 EPS, although we believe this premium multiple is justified given our projected 17% EPS CAGR during the next five years, along with the company's high-quality and resilient earnings base.

The stability of the automotive aftermarket parts industry is one of Bapcor's most attractive characteristics. We expect the core trade segment to perform well through various stages of the cycle, which can be highly volatile, as demonstrated in the recent July trade figures showing new vehicle sales falling by approximately 8% on the previous corresponding period. We forecast low-double-digit top-line growth (excluding Hellaby NZ), over the medium to long term. This is primarily driven by expansion of both the trade network, under the Burson brand, and the recently acquired Autobarn retail chain. We forecast Bapcor's network to reach 200 trade and 200 retail stores by fiscal 2022, up from the current 163 and 124, respectively. This would see the firm adding on average 10-15 new trade and retail outlets per year, taking its market share to above 40% within the five years. We believe this is achievable given the firm's strong track record, and the highly fragmented nature of the market. The trade network expansion will comprise both greenfield sites and acquisitions of smaller independent retailers, which should help build scale and further strengthen the firm's competitive edge.

Whilst still early days, we are eager to see the performance of the first store opened in Asia. The company recently opened its first store in Thailand and plans to open four additional stores this year. At this point, the company is just testing the market for viability, and any contribution from these initial stores would be immaterial to earnings. The main driver of Bapcor's group performance remains the core Australian business. If this concept proves successful overseas, the company is likely to continue the roll out, and expand into neighbouring countries. The company has not yet laid out any strategic targets, as such we have not yet incorporated these stores into our assumptions. Even if we were to assume the company rolls out 10 stores per year, with a per-store earnings base similar to the Australian Burson stores (both aggressive assumptions in our view) the potential upside to our fiscal 2021 EPS estimates would be less than 5% (based on Bapcor's 51% stake). Moreover, this would be partially offset by the cost of the store rollout, which would further limit the impact on our fair value estimate.

Management recently flagged the company would not be pursuing the acquisition of the Kmart Tyre and Auto business, which Wesfarmers has flagged for sale. The company is no stranger to vertical integration, and in our opinion there would've been synergy opportunities. By acquiring the Kmart Tyre and Auto business Bapcor would secure a new customer, as it currently only services a small fraction of the Kmart workshops. This would increase volume in the Burson trade stores which would add scale and further strengthen the company's competitive advantage, meanwhile increasing the opportunity for private label sales, which would be supportive of margins. In our opinion the only reason for passing up the opportunity would be if the purchase price could not be justified by the synergy opportunity, in which case we applaud management for walking away from the deal. To-date, the company's acquisition track record has been very measured, and with a substantial organic growth runway ahead we see no incentive to overpay acquisitions.