BAP: Servicing the auto sector continues to deliver

One company that has turned in a good result this reporting season is Bapcor (ASX:BAP). Bapcor shares rose 5.9% on the day their financial year 2023 results were released.

Bapcor is a wholesaler and retailer of parts for trucks and cars. Their business has four main segments. The largest segment by revenue is the Specialist Wholesale segment which services the truck and specialist wholesale markets. Of almost equal size is the Trade segment which supplies parts and equipment to automotive workshops. These each account for 36% of revenue.

The retail segment accounts for 20% of revenue and has storefronts selling parts and accessories to the general public. It includes well known brands such as Autobarn and Burson auto parts. The final 8% of revenue comes from New Zealand and includes trade sales and wholesaling.

Bapcor has almost 1000 locations spread across Australia and New Zealand plus a handful in Thailand.

The business primarily supplies parts for vehicles that are being serviced. This is concentrated in vehicles that are four or more years old. Therefore they benefit as the average age of cars on the road increases. They are not as heavily reliant on new car sales like some of their competitors such as GUD. Of more importance is the overall number of vehicles on the road and their age.

In Australia the average vehicle age is 11 years. This has been gradually increasing and is forecast to keep aging. In New Zealand the average age is 14 years. The number of vehicles on Australian roads is 21 million and forecast to keep growing. There are 5 million in New Zealand.

The trend towards more electric vehicles could be a long-term threat to Bapcor as EVs have fewer moving parts and therefore would need less replacement parts as they age. Bapcor are trying to get on the front foot in this regard. They have commenced a project to be a leading provider of parts for the increasing range of low emissions vehicles as well as providing accessories. Of course, some of the existing parts and accessories are also able to be utilised in EVs, for example brakes and wheel bearings and many others.

Bapcor is rated as a high Quality stock according to Stockopedia’s stock ranking system with a rank of 87. This reflects the solid financials which were again on show with the latest report. Over the last five years revenue has achieved a compound average growth rate of 10.3% surpassing $2 billion for the first time this year.

Gross margins are quite high at 46.7% and have remained stable over the last five years. Earnings before interest, tax, depreciation and amortisation (EBITDA) margins are solid, ranging from 13.5% for the Specialist Wholesale category to 18.1% for the New Zealand segment. The overall margin is 14.8%.

Gross profits and EBITDA have also been growing at a strong rate in recent years. Net profit has also been growing, but at a much slower rate of 2.4% over five years and earnings per share (EPS) have only grown at 0.7% per annum. The net profit was dragged down by one-off expenses incurred in the commissioning of new distribution centres in Victoria and Queensland as well as a large investment in a program to improve the efficiency of operations and try and capitalise more on their economies of scale. For example by using their combined purchasing power to push for better terms with suppliers.

EPS has held pretty steady over the past 5 years. Dividends per share have been increasing, which means so too has the payout ratio. The share price has been trading in a fairly narrow range for the last 7 years. This means that for long-term shareholders the main source of return has been the growing dividend payments, which are fully franked.

Aside from the earnings side, the Quality rank is also boosted by the strong balance sheet and cash flow. The net financial debt to equity ratio is only 22%. Financial debt was reduced by $15 million over the last year. Cash generation is strong, with operating cashflow per share often exceeding EPS. This leaves adequate cash flow for capital expenditure as well as dividends.

Market analysts are forecasting sales growth of 5.8% and EPS growth of 31.9% in 2024. The high EPS growth reflects the suppressed profit this year from the one-off items mentioned above. If they are removed the forecast growth rate is 11%.

These are strong growth rates, particularly given the generally dour mood surrounding retail at present. They are backed up by management’s expectation of continuing strong demand in the trade segment and potential consolidation opportunities in the truck market. These two segments account for 72% of revenue.

Management acknowledge that the Retail segment is likely to face a more challenging environment. As households come under pressure, accessorising their cars may drop down the priority list. They are expecting things to start improving in New Zealand. Margin pressure from cost inflation will remain.

All of these elements combine to make Bapcor a stock worthy of consideration. They are currently trading on a forward PE ratio of 15.6, which is not cheap, but if they can deliver on expectations, it may represent good value.

---

Important Information: Stockopedia Ltd ABN 39 757 874 670 UK business registration number 0637267 (“Stockopedia”) is an Authorised Representative of Daylight Financial Group Pty Ltd ABN 77 633 984 773 (“DFGPL”) which is the holder of an Australian Financial Services Licence (AFS Licence No. 521404).

Information in this commentary is current as at date prepared unless otherwise stated. However, please bear in mind that investments can go up or down in value, and that past performance is not a reliable indicator of future performance. For more Important Information please refer to the Disclaimer section of this website.

This communication may contain general financial product advice. It has been prepared without taking into account your personal circumstances, and you should therefore consider its appropriateness in light of your objectives, financial circumstances and needs before acting on it.

If our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement (PDS) before making any decision.