Company Reports

Demand headwinds, competitive pressure, management tumult, and operational missteps weighed heavily on Bapcor in fiscal 2024. Underlying net profit declined 24% to AUD 95 million, marginally below our AUD 96 million forecast. The statutory result was an AUD 158 million loss, mostly due to an impairment in the retail business. However, we expect this to prove a trough year for Bapcor and shares trade at a material discount to our unchanged AUD 7.30 fair value estimate. We expect demand for discretionary goods to revert to trend levels in the longer term and underlying automotive spare parts demand—the bulk of earnings—to remain resilient. Bapcor’s trade network, which underpins its narrow economic moat, enables it to supply a wider range of often slow-moving parts more quickly and at a lower cost than smaller competitors.

We expect Bapcor's strong earnings growth to return as the competitively advantaged trade business capitalizes on favorable industry dynamics. We forecast Bapcor continuing to capture market share in the fragmented trade business as it rolls out stores. We forecast a double-digit EPS compound annual growth rate over the next five years as the business recovers from trough earnings in fiscal 2024, buoyed same-store sales growth of around 2%-3% per year, and growing private-label penetration.

Management uncertainty at Bapcor has settled with the appointment of Angus McKay. Most recently leading 7-Eleven Australia, McKay is set to take over as Bapcor’s executive chair and CEO on Aug. 22, 2024. The company had fallen into turmoil when prior appointment Paul Dumbrell, poised to take the helm from May 1, 2024, decided not to join at the eleventh hour—with little detail on why. Crucially, despite management turnover, we continue to think Bapcor’s competitive position remains intact. Bapcor’s trade network, which underpins its narrow economic moat, enables it to supply a wider range of often slow-moving parts more quickly and at a lower cost than smaller competitors.

Bain Capital is looking to pick up Bapcor on the cheap. While the private equity outfit’s nonbinding, indicative proposal of AUD 5.40 per share is 19% above the undisturbed closing price on June 7, 2024, it’s 29% below our unchanged AUD 7.30 per share fair value estimate. We think Bain is looking to capitalize on share price weakness following a softer performance in the retail business and management tumult. The proposal is highly conditional and subject to due diligence, unanimous support from the Bapcor board, and regulatory approvals—including from the Foreign Investment Review Board. Bapcor’s board is assessing the offer.

We lower our fair value estimate for shares in Bapcor by 9% to AUD 7.30 per share. The retail business is taking longer to recover than expected, margins in wholesale are under pressure, and the “Better than Before” program has made things worse than before. Senior management instability has also brought unnecessary turmoil to a business already struggling to win over investors.

We expect Bapcor's strong earnings growth to continue as the competitively advantaged trade business capitalizes on favorable industry dynamics. We forecast Bapcor continuing to capture market share in the fragmented trade business as it rolls out stores. We also project same-store sales growth of around 2%-3% per year and growing private-label penetration to more than offset near-term headwinds, leading to a five-year EPS CAGR of 9%.

We expect Bapcor's strong earnings growth to continue as the competitively advantaged trade business capitalizes on favorable industry dynamics. We forecast Bapcor continuing to capture market share in the fragmented trade business as it rolls out stores. We also project same-store sales growth of around 3% per year and growing private-label penetration to more than offset near-term headwinds, leading to a five-year EPS CAGR of 13%.

A slowdown in discretionary spending is weighing on Bapcor’s near-term. The first-half underlying net profit after tax of AUD 54 million was about 13% below the previous corresponding period. This is mainly due to continued weakness in the retail business, which is more exposed to discretionary purchases. Retail EBITDA fell 12% amid both revenue decline and margin degradation. By contrast, the specialist wholesale and trade businesses, including New Zealand, enjoyed revenue and EBITDA margin growth. These businesses are primarily nondiscretionary, selling maintenance-related automotive parts.

We expect Bapcor's strong earnings growth to persist as the competitively advantaged trade business capitalizes on favorable industry dynamics. We forecast Bapcor continuing to capture market share in the fragmented trade business as it rolls out stores. We also project same-store sales growth of around 3% per year and growing private-label penetration to more than offset near-term headwinds, leading to a five-year EPS CAGR of 13%.

We make no changes to our AUD 8 fair value estimate for shares in narrow-moat Bapcor. First-half fiscal 2024 underlying EBITDA is slated to be about AUD 143 million, or about 2% below the previous corresponding period. Cost of living pressures drag on retail segment demand and, hence, the segment’s profitability. We lower our fiscal 2024 EBITDA forecast by 1% to AUD 301 million, or 10% above fiscal 2023.

Shares in narrow-moat Bapcor screen materially undervalued amid both short-term headwinds and structural changes facing the automotive industry. A slowdown in discretionary spending weighs on retail near term, new management still needs to prove itself, and the proliferation of electric vehicles, or EVs, is a long-term obstacle for the trade business. However, we think near-term pessimism overlooks fundamental resilience in automotive spare parts, and Bapcor is likely to successfully adapt to the gradual technological transition. Our AUD 8 fair value estimate stands.

We expect Bapcor's strong earnings growth to persist as the competitively advantaged trade business capitalizes on favorable industry dynamics. We forecast Bapcor continuing to capture market share in the fragmented trade business as it rolls out stores. We also project same-store sales growth of around 3% per year and growing private-label penetration to more than offset near-term headwinds, leading to a five-year EPS CAGR of 13%.

We think pessimism around Bapcor is too focussed on the weak near-term outlook, overlooking the strong underlying dynamics in automotive spare parts. We lower our near-term earnings forecasts, but the cut is immaterial to our unchanged AUD 8.00 fair value estimate as we make no material changes to our long-term forecasts. We expect Bapcor to continue to capture share from the long tail of smaller competitors by distributing a wider range of spare parts quicker, more reliably, and at a lower cost—competitive advantages that furnish the firm with a narrow economic moat.

We maintain our AUD 8 fair value estimate for Bapcor. Underlying fiscal 2023 net profit after tax of AUD 125 million was 5% lower than fiscal 2022 and about 7% below our prior forecast. Better-than-expected top-line growth was offset by weaker margins, particularly in retail. The dichotomy between discretionary and nondiscretionary automotive expenditure has manifested in the results. Rising cost of living pressures weighed on retail profitability, while the trade and wholesale divisions proved resilient. We lower our fiscal 2024 underlying NPAT forecast by about 10% to AUD 138 million. We anticipate the subdued retail environment, which is more exposed to discretionary purchases, will continue to weigh on profitability into fiscal 2024. Despite the weaker near-term outlook, the underlying dynamics in automotive spare parts are positive, and we make no material changes to our long-term forecasts.

We maintain our AUD 8.00 fair value estimate for shares in narrow-moat Bapcor following a market update. Bapcor provided limited qualitative guidance, principally pointing to an expectation for half-on-half improvement in trading. We maintain our fiscal 2023 EBITDA forecast of AUD 308 million, implying an 11% half-on-half improvement from AUD 146 million banked in the first half, underpinned by strength in the core trade and wholesale businesses. At current prices, shares in Bapcor screen undervalued.

We raise our fair value estimate for narrow-moat Bapcor to AUD 7.60, from AUD 7.30 previously, principally due to time value of money. Fiscal 2021 underlying net profit after tax, NPAT, increased 47% on the prior corresponding period, or pcp, to AUD 130 million--14% ahead of our prior forecast. The result was aided by government stimulus, pent-up demand, and the first full-year contribution from the Truckline and Diesel Drive acquisitions. Same-store sales grew strongly over the period as the firm's physical footprint continued to expand, and profitability improved across the board in fiscal 2021 underpinned by effective cost controls, improved operating leverage, and an increase in private label sales. Bapcor announced a final dividend of AUD 11.00 cents per share, bringing the full-year fully franked dividend to AUD 20.00 cents per share, 14% above the previous corresponding period.

We raise our fair value estimate for narrow-moat Bapcor by 4% to AUD 7.30 per share, due in equal parts to an increase in near-term forecasts and time value of money. Group sales increased 26% compared with the prior corresponding period, or PCP, underpinned by strong same-store sales (notably 37% for Autobarn stores) and additional revenue from an expanded store footprint. Effective cost controls and improved operating leverage led to a 54% increase in underlying NPAT on the PCP to AUD 70 million. We lift our fiscal 2021 NPAT forecast by 5% to AUD 114 on the back of the stronger-than-expected first half. Bapcor declared an interim fully franked dividend of AUD 0.09 per share, up 13% on the PCP--tracking our full-year forecast of AUD 0.18 per share, representing a payout ratio of around 50% of underlying earnings.

We expect Bapcor's strong earnings growth to persist as the competitively advantaged trade business capitalises on favourable industry dynamics. We forecast the firm continuing to capture market share in the fragmented trade business as it rolls out stores. We also project same-store sales growth of around 4% per year and growing private-label penetration to more than offset near-term headwinds, leading to a five-year EPS CAGR of 14%.

We expect Bapcor's strong earnings growth to persist as the competitively advantaged trade business capitalises on favourable industry dynamics. We forecast the firm continuing to capture market share in the fragmented trade business as it rolls out stores. We also project same-store sales growth of around 4% per year and growing private-label penetration to more than offset near-term headwinds, leading to a five-year EPS CAGR of 13%.

We lower our fair value estimate for Bapcor to AUD 6.60 from AUD 7.10 following the transition to a new analyst. The reduction to our fair value estimate is principally due to lower top-line growth assumptions. The firm's trade businesses in Australia and New Zealand, which contribute the majority of consolidated earnings, enjoy competitive advantages over smaller peers in the highly fragmented automotive parts industry, underpinning Bapcor's narrow economic moat rating. Our Standard stewardship and medium fair value uncertainty ratings remain intact. We forecast an EPS CAGR of 8% over the five years to fiscal 2024 as continued expansion of the firm's store network and the increasing fleet of vehicles on Australian roads more than offset near-term headwinds from the coronavirus and the dilutive impact of the recent equity raising. Last trading at a discount of 11% to our updated fair value estimate, shares in Bapcor screen as undervalued.