A weak macro environment has beset car parts specialist Bapcor ((BAP)) but brokers remain upbeat about the ability of the business to generate attractive returns. Morgans suggests there is increased confidence in the company’s capacity to grow, reflected in its geographical expansion and acquisitions.
Bapcor has conducted a tour across its trade, retail and specialist wholesale operations. UBS points out the complexity in supplying a broad range of products to trade customers, generally, and, hence, the difficulty in also replicating Bapcor’s position in this area.
The broker considers the company’s target of more than 35% privat -label penetration in trade, versus the current 24.7%, is achievable and reiterates a Buy rating. Morgans believes the increased private label penetration will assist margin expansion and Bapcor is a relative safe haven in a volatile retail sector.
There are complexities in running a large business with many brands amid the need to invest in digital and supply chain. Yet Morgans notes the company has reiterated its guidance several times in recent weeks and solid single-digit growth can be expected in FY20.
Morgans acknowledges the company’s growth profile has slowed from lofty heights but the business retains a defensive basis. The main focus is balancing same-store sales growth/gross margin to optimise profit, Macquarie asserts, also noting the opportunities in private label, store roll-outs and category expansion.
The company has reported its commercial truck part acquisitions have performed well, with around 40 stores targeted against the current 14. Whilst Bapcor does not compete with original equipment manufacturers (OEM), it differentiates its offer by selling both OEM and aftermarket parts for all major Japanese commercial truck manufacturers.
Morgan Stanley points out the stock has de-rated by -25% amid competitive concerns and a soft consumer environment. Regardless, the broker finds the risk/reward compelling, given the ability to deploy capital either into organic roll-out or acquisitions that leverage existing distribution and infrastructure.
The company has acknowledged that there is scope for improvement in marketing. The retail network is expected to improve its promotions calendar and reduce the heavy reliance on catalogues while better exploiting advertising and digital opportunities. There is a lack of awareness in the wholesale business around the quality or value proposition of many of the brands in the portfolio, which the company will seek to address.
Bapcor has opened four Burson stores in Thailand as part of a joint venture and will open another two shortly and is encouraged by the early response. UBS notes by behaviour by mechanics needs to change in order to lift sales volumes and the initial stores will need several months of trading, along with a parts catalogue for customers, before the model can be finessed for further roll-out.
Macquarie and Morgan Stanley observes market dynamics are attractive in Thailand, a fragmented market which has no large-scale competition or relationships with workshops. The company expects Thailand could support a trade business that is 60-70% of the size of Australia. This could be significant, Morgan Stanley assesses.
The company will start to rationalise 18 warehouses across Australia with its latest warehouse management IT infrastructure. The first major new distribution centre in Victoria is expected to be operational late in FY21. Beyond that, the company will likely consolidate the Brisbane and Western Australian warehouses, with cost savings on offer similar to the $10m envisaged for Victoria.
Morgan Stanley believes there is scope for significant rationalisation of the current warehouses footprint with goods-to-person driving labour optimisation. A $50m capital expenditure investment is expected to yield a $10m efficiency benefit and an upfront -$10m reduction in inventory.
This implies a 25% return on the $40m in net investment in relation to Melbourne. The broker sees no reason why a similar strategy would not be successful for the Brisbane footprint.
Structural vs Cyclical
While recent weakness has had investors questioning whether structural factors are at play, Macquarie notes this is not dissimilar to the US in 2017. Comparables subsequently rebounded there and valuations re-rated strongly.
Macquarie calculates the de-rating of the stock has meant it trades at a -17% discount to peers and, while softer conditions are likely to persist, there is scope for improved demand from recent monetary/fiscal stimulus.
Structural issues that centre on Amazon, which announced a further push into the US aftermarket space, have also abated in the US. Macquarie notes Amazon’s penetration has been limited to date, given challenges regarding inventory, distribution and service requirements.
Macquarie believes opportunities exist for aftermarket distributors to evolve their business models in response to changes in the automotive industry, but this is a slow development which provides ample capacity for a response.
The broker expects consolidation of independent workshop networks is likely over time and larger franchises are expected to prevail versus traditional mechanical shops, given the vehicle computerisation trend and resulting capital requirements.
In sum, Macquarie believes the recent softening in operating trends is cyclical while competitive dynamics in the industry are rational. Moreover, the US experience suggests a cyclical recovery is the near-term catalyst in Australia.
FNArena’s database shows five Buy ratings. The consensus target is $6.86, signalling 15.1% upside to the last share price. Targets range from $6.31 (Morgans) to $7.60 (Morgan Stanley).