Morningstar | Shares in GUD are Only Marginally Overvalued Following Recent Sell-Off
Shares in GUD Holdings have come down from August highs of over AUD 15.00, but at current prices still remain modestly overvalued compared to our unchanged fair value estimate of AUD 11.00. Following a series of divestments in recent years, the firm now holds a portfolio more focused on the core automotive division, which delivers the majority of revenue. However, the division lacks competitive advantages to warrant awarding an economic moat, and it remains highly exposed to internal combustion vehicles – and the long-term threat posed by electric vehicles.We expect the automotive division to capture share in the highly fragmented market – through both acquisitions and organic growth. This supports our revenue forecast of almost 10% per year on average during the next five years. We forecast EBITDA margins in the division to recover to around 30% by fiscal 2021, from the current 29%. Margins dipped slightly during fiscal 2018 as some of the recently acquired businesses were slightly margin dilutive. However, given the company’s track record of extracting synergies from bolt-on automotive acquisitions, we are confident margins will recover.
Over the next five years we project an EBITDA CAGR of 10% for the automotive division. However, over the longer-term, the firm's exposure to internal combustion vehicles remains a concern. The automotive business comprises the vast majority of GUD's earnings, and following the sale of Oates, the firm's vulnerability to the trend towards electric vehicles is firmly in the spotlight. While management acknowledges this threat, actions speak louder than words, and in our opinion the acquisitions of AA Gaskets in fiscal 2018, and Disc Brakes in fiscal 2019 do little to address this risk. The company noted that about 50% of automotive segment revenue is exposed to internal combustion vehicles, although we estimate this represents the majority of earnings which will eventually come under pressure.
GUD Holdings is engaged in the manufacture and importation, distribution and sale of cleaning products, household appliances, warehouse racking, industrial storage solutions, office storage products, automotive products, locking devices, pumps, pool and spa systems, and water pressure systems, with operations in Australia, New Zealand, France, Spain, China, Malaysia and Hong Kong. Co.'s reportable segments are Oates, Automotive (Ryco, Wesfil, Goss), Davey, Dexion, and Lock Focus.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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