EUR 850.00 For Business Accounts Only

Morningstar | Resilient Automotive Trade Segment Should Help Bapcor Through Challenging Consumer Environment

After falling by over 20% during the past few months, shares in narrow-moat-rated Bapcor are now attractively priced relative to our AUD 7.00 per share fair value estimate. The sell-off is likely a reflection of softening consumer spending and sentiment, although we believe Bapcor’s earnings should continue to grow strongly, even in the current economic climate.

One of the firm’s most attractive characteristics is the bulk of its earnings are exposed to the automotive trade segment. While consumers may temporary delay major expenditure on vehicle maintenance, this cannot be avoided entirely, as the cost of engine failure would entail considerably larger cost. Demand for aftermarket auto parts has proven resilient, underpinned by the total pool of vehicles, which does not change very much despite fluctuating new vehicle sales. We project the vehicle fleet to continue growing at 2% per year for the foreseeable future. In some cases, we have seen maintenance expenditure benefit from slowing vehicle sales, as consumers opt to prolong the lift of an older vehicle rather than upgrading.

We forecast high-single-digit top-line growth for the next five years. This is driven by ongoing expansion of the Burson trade network, around 4% growth in like-for-like sales growth, which incorporates around 2% fleet growth and modest pricing increases. Given the highly fragmented nature of the trade space, Bapcor’s scale and brand power place it in a strong position to continue consolidating this market. We also forecast group EBITDA margins to expand by around 160 basis points from current levels to 13.6% by fiscal 2023. This is reflective of our expectation of increasing private label penetration to around 35%, from around 22% currently which is significantly lower than industry standards. Additionally, the growth in scale has seen the company reap the benefits of operating leverage, while also extracting larger rebates from suppliers, demonstrating increasing bargaining power.