Bapcor Steering Earnings Growth Beyond FY21




As more Australians take to the roads amid prolonged international travel restrictions, Bapcor ((BAP)) is in the front seat. Its automotive parts business is continuing to perform and the company is considered well-placed to accelerate both organic and operating performance, given the initiatives being undertaken.

Bapcor has noted an increase in second-hand vehicle sales, with commuters continuing to avoid public transport, and more expenditure on domestic holidays, resulting in the greater use of private vehicles.

Burson auto parts and the Autobarn retail operation were the stand-out features of the March quarter update, with like-for-like sales growth of 13% and 35%, respectively.

The rate of sales growth should moderate in the fourth quarter as the company cycles elevated comparables but strong profit growth is still expected over FY21. Moreover, Ord Minnett points out there are few signs as yet that sales are actually moderating.

Earnings growth should be driven by demand in the core Burson business as well as continued expansion of the store network in Australasia and ongoing improvement in margins through higher home-brand sales.

Credit Suisse quips Bapcor is still struggling to shrug off the "covid beneficiary" tag and considers this view unjustified as, unlike many retailers, there is a clear opportunity to grow operating earnings into FY22.

Hence, the current valuation appears attractive relative to both the market and peers. The broker's estimates for operating earnings of $240m represent 2% growth and the ability of Bapcor to cycle FY21 is assessed as the single biggest catalyst for the stock.

The increased number of cars on the road from domestic travel, accelerated store roll-out amid early benefits of the distribution centre consolidation means this could be readily achievable, in the broker's view.

Bapcor has signalled the project to consolidate the seven Queensland distribution centres into one centralised location, similar to Victoria, will optimise the supply chain, although Citi expects both expenditure and savings will be lower than for Victoria.

The store roll-out for Autobarn is also slower than expected, which the broker believes is a function of delays stemming from the pandemic.

This is a top small-cap auto pick for Citi and a Buy rating is reiterated. Favourable conditions are likely to be around longer and the broker highlights the investment in a number of growth strategies such as supply chain optimisation, Asian expansion and private-label.

Fundamentals in the vehicle aftermarket are enduring and the company has the balance-sheet capacity to pursue acquisitions as they arise, Macquarie adds. Opportunities include growing the existing footprint in Australasia and Asia, optimising the supply chain and further investment in technology.

FNArena's database has six Buy ratings and one Hold (Morgans, yet to comment on the update). The consensus target is $9.08, suggesting 11% upside to the last share price.