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Bapcor remains a great play on domestic tourism

21102020_Bapcor

Bapcor remains a great play on domestic tourism

Bapcor (ASX:BAP) – Australia’s leading aftermarket auto parts distributor – has enjoyed very strong trading conditions since mobility restrictions have eased, and its share price has rallied accordingly. BAP has both growth and defensive qualities and remains a great way to play the domestic tourism thematic which could prove stronger for longer. And the balance sheet is now primed for acquisitions, further enhancing the growth potential of the company.

The company’s recent first quarter update (1Q21) highlighted 27 per cent sales growth despite drags from government restrictions in Victoria and Auckland. Growth is being propelled by multiple tailwinds including strong used car sales, reduced use of public transport, government stimulus and a redirection of consumption, particularly towards domestic tourism.

Although some of these forces are expected to eventually normalise, we see real potential for a ‘stronger for longer’ scenario playing out for the company. Even with the arrival of an effective COVID-19 vaccine, the shape of an international travel recovery will likely be gradual rather than a sharp snap back which is supportive of domestic holidays over the next few years (BAP benefits from more miles driven).

Additionally, working from home trends may persist for some time yet and the jury is still out on the extent these changes are structural in nature. Victoria coming out of lockdown will also be positive for BAP’s earnings trajectory in the near term.

Drilling down into the 1Q21 result, Burson Trade sales grew 10 per cent (7.7 per cent like-for-like and up 17 per cent excluding Victoria), New Zealand grew 6 per cent (4 per cent like-for-like), Retail grew 47 per cent (Autobarn company owned same store sales up 50 per cent) while Specialist Wholesale sales grew 45 per cent (18 per cent organic).

On the back of robust year to date trading, BAP expects strong 1H21 growth while 2H remains unclear – management refrained from providing FY21 earnings guidance which is understandable considering the uncertain broader backdrop.

That said, we note the resilience of the aftermarket auto parts sector while 2H21 will be lapping the COVID-19 lockdown period (2H20 NPAT declined 15 per cent) – this suggests FY21 should shape up as a very strong year for the company.

Notwithstanding the strong rally in the share price since pandemic lows, we view BAP as an attractive play on (‘stronger for longer’) domestic tourism whilst also offering investors with defensive-growth attributes. Earnings are relatively defensive (80 per cent derived from the trade sector where demand largely reflects miles driven and an old car fleet) and the growth strategy has multiple facets (industry consolidation, private label penetration, operational efficiencies, store roll-out and market expansion).

The balance sheet is also in very strong shape which positions the company well for potential corporate activity should opportunities arise.

The Montgomery Small Companies Fund  owns shares in Bapcor. This article was prepared 21 October with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Bapcor you should seek financial advice.

Bapcor has both growth and defensive qualities and remains a great way to play the domestic tourism thematic which could prove stronger for longer. Dominic looks at the recent first quarter update. Click To Tweet
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Dominic is the Portfolio Manager of the Montgomery Small Companies Fund. Dominic joined Montgomery in August 2019 after spending thirteen years specialising in smaller companies in portfolio management and equities research. Most recently, Dominic was a Portfolio Manager and Senior Research Analyst at MHOR Asset Management in Sydney for three years. Prior to this, he ran Deutsche Bank’s Small Caps Equity Research Team in Sydney for six years. He was also previously Head of Research at Foster Stockbroking.  

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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4 Comments

  1. Thanks Dom. Is it worth 26x PE though …. ? Looks like it’s already bounced back to pre-COVID highs.

    • Hi Josh, given the strong balance sheet position post equity raise (0.6x ND/EBITDA vs 2.5x historic) we believe EV/EBITDA multiples are more appropriate when assessing value for BAP. On this measure, the stock is trading on 11.7x FY21 EBITDA which sits below the Small Ords market multiple of 12.1x. We think a premium multiple is warranted considering BAP’s defensive-growth attributes and balance sheet optionality. Consensus estimates also look conservative with upside risk from stronger for longer domestic travel activity and potential acquisitions. BAP is a natural consolidator of the highly fragmented aftermarket auto parts sector. Cheers.

    • Hi Mark, thanks for your question. Despite the strong rally in the shares, we still see valuation as undemanding at current levels – the stock is trading on 11.7x FY21 EBITDA which sits below the Small Ords market multiple of 12.1x. We think BAP deserves a premium multiple to account for its defensive-growth attributes and balance sheet optionality. Upside earnings risk exists from stronger domestic travel activity whilst the international borders are shut, as well as from potential acquisitions. Consensus estimates look conservative and the balance sheet has never been in such strong shape for this company since listing. The market remains fragmented so we expect BAP to put its balance sheet to work over the coming years. Cheers.

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