Bapcor Riding the Increasing Sum of the Parts
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The business press may be full of stories indicating that retail is struggling in Australia, in the wake of an underwhelming Christmas season, but not every sector of the market is equally gloomy.
In particular, the automotive parts and services business is doing well. It’s a $5 billion industry, with insurance companies alone spending about $2 billion a year on car parts. Even if economic conditions are not such that consumers are willing to spend on new cars, they are generally willing to continue to spend money on servicing and repairing their existing vehicle – people need their cars to go to work and drop children at school.
Certainly, automotive parts was the shining light in the underwhelming performance of consumer and industrial products company GUD Holdings in its interim report for the December 2016 half-year. While the Davey Pumps, Oates Cleaning equipment and Dexion storage systems businesses all disappointed, the auto parts division – which includes Ryco oil, air and fuel filters and Narva accessories – was the bright spot, boosting earnings by 10%.
The health of the auto parts business should be shown even more clearly when specialist wholesaler and retailer Bapcor Limited (BAP) reports its half-year figures on Thursday. Bapcor is the largest car parts supplier in the Australian market, with a national network of franchised and company-owned retail stores operating under its Burson Auto Parts, Precision Automotive Equipment, Autobarn, AutoPro, Sprint Auto Parts and CarParts brands. Bapcor operates more than 133 stores across Australia.
As a wholesaler Bapcor supplies more than 500,000 car parts to mechanics around Australia who operate independent workshops, while it also supplies chains including Ultra Tune and Kmart Tyre and Auto. BAP also franchises out its Midas Mufflers and ABS brands to third-party vehicle service centres across Australia.
Bapcor was listed on the Australian Securities Exchange (ASX) as Burson Auto Parts in April 2014, at $1.85 a share. In mid-2015 it spent $283 million buying Metcash’s automotive operation, which gave it ownership of Autobarn, Autopro and Midas Mufflers. The Metcash acquisition – subsequently renamed Aftermarket Network Australia – brought with it ten distribution centres, 500 franchised automotive retail stores operating under the Autobarn, Autopro and Car Parts brands, 150 franchised automotive service centres operating under the ABS and Midas brands, along with about 3,000 other aftermarket customers throughout its ATAP, IBS and Garrmax channels.
Buying the Metcash businesses was a game-changer for BAP, boosting the scale of its wholesale and distribution business, adding new retail and service channels, and complementing its strong trade customer focus. Later in 2015, Bapcor also acquired a network of specialty four-wheel drive parts and accessory stores called Opposite Lock. In mid-2016 the company changed its name to Bapcor.
Last year, Bapcor made five more acquisitions: Bearing Wholesalers, an Australian wholesale distributor of automotive bearings; Precision Automotive, an Australian distributor of automotive workshop equipment; Baxters, a wholesale distributor of specialist automotive electrical equipment; MTQ Engine Systems, a diesel and turbocharger sales and service provider; and Roadsafe Automotive Products, a wholesale distributor of steering and suspension products.
Last month, Bapcor completed the $336 million takeover of New Zealand company Hellaby Holdings, which generates about 60% of its earnings from automotive operations in New Zealand and an auto-electrical business in Australia.
Hellaby also runs three shoe retailing chains in New Zealand, which trade under the banners of Hannahs, Number One Shoes and Hush Puppies, operating a combined 117 stores. Hellaby also runs a resources contracting business, which provides specialist services to the oil and gas and petrochemical industries, and the TBS Group, which is involved in transmission tower and wind farm maintenance.
Bapcor has installed four new directors at Hellaby after securing control of the New Zealand firm – it has said it plans to sell the equipment, resources and footwear businesses, using the remaining automotive division as a foothold in the New Zealand market, where car sales have been hitting record levels over the last three years due to a rapid increase in population and fast growing economy. Bapcor believes conditions in the New Zealand automotive market are very similar to Australia, with strong new car sales and solid growth prospects for car parts.
The upshot of the acquisitions and organic growth is that Bapcor has a dominant position in the Australasian auto parts and services business, which is relatively immune to economic cycles – people get their vehicles serviced regularly and if they need to be repaired, they take them to a mechanic regardless of economic conditions or confidence levels. The bulk of Bapcor’s revenue essentially comes from non-discretionary spending.
It’s no wonder that the stock now trades at $5.79, which capitalises Bapcor at $1.6 billion.
The Bapcor business is now organised under three segments:
• Trade – Burson Auto Parts and Precision Automotive Equipment
• Retail – Autobarn, AutoPro, Sprint Auto Parts and CarParts retail stores, and the Midas and ABS service workshops
• Specialist Wholesale – comprising AAD, Opposite Lock and Bearing Wholesalers
In the 2015-16 financial year, Bapcor lifted revenue by 83% to $685.6 million, and boosted net profit by 89% to $43.6 million. Earnings per share (EPS) grew by 31% to 17.85 cents, while the full-year dividend was lifted by 2.3 cents, or 26.4%, to 11 cents. Although the former Metcash businesses contributed 11 months of trading, the existing businesses performed strongly, with the Trade and Retail segments reporting increases in same-store sales of 4.6% and 5.2% respectively.
The release of the FY16 results was accompanied by positive guidance, with Bapcor saying that it expected FY17 net profit to increase by between 25% and 30%. The company said it expected another strong year of revenue and profit growth, with the inclusion of a full 12 months trading of the former ANA businesses, the inclusion of the acquisitions of Bearing Wholesalers, Sprint Auto Parts, Precision Automotive Equipment, Baxters and Roadsafe, and the benefit of optimisation savings. This guidance was given before the Hellaby’s acquisition – it specifically excluded any further acquisitions.
According to FN Arena’s collation, the analysts’ consensus expects BAP to lift EPS by 33.2% in FY17, to 23.8 cents, with 29% growth following in FY18, to 30.7 cents. The fully franked dividend is expected to rise by 32% this year, to 14.5 cents, increasing by a similar amount in FY18, to 19.2 cents. At $5.79, that prices BAP on an expected FY17 dividend yield of 2.5%, and 3.3% for FY18.
The stock is not cheap, trading on those expectations at 24.4 times forecast FY17 earnings and 18.8 times FY18 earnings, but the analysts do see scope for share price growth – FN Arena has their consensus target price at $6.14, or 6% above the current share price. However, the two most recent brokers to update their price targets, UBS and Morgan Stanley, see the stock at $6.85 and $6.75 respectively, widening the appreciation potential significantly – and that is in light of the Hellaby takeover.
Having given relatively buoyant guidance, Bapcor cannot afford to disappoint the market in its half-year result on Thursday. But once it beds down the Hellaby purchase and rationalises that company’s non-automotive holdings, the market will get an idea of the true net cost of the acquisition, and just what it can add to earnings.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au