Bapcor’s (ASX: BAP) fiscal 2025 underlying net profit fell 8% to $80 million. While trade is growing, it is being offset by weakness in the retail “do-it-yourself” business and disruptions to its specialist wholesale networks.

Why it matters: The company released a trading update in late July, so the result held few surprises. Net profit was about 1% below our forecast and July guidance. Bapcor is a business in turnaround, which is causing near-term disruption. We lower our fiscal 2026 net profit by 4% to $94 million.

  • Management is simplifying the business, cutting costs, and focusing on the core Burson trade network. Cost-outs, like branch and distribution center consolidation, have been disruptive to sales. While painful in the near term, these steps are probably necessary.
  • The retail environment is also weighing on Bapcor’s Autobarn stores. Demand is lower for discretionary products like 4WD accessories, and competition with the likes of Supercheap Auto remains intense.

The bottom line: We maintain our $6.00 fair value estimate. Shares in narrow-moat Bapcor screen materially undervalued. We think the market is concerned with the uncertain duration of Bapcor’s turnaround and persistent weakness in retail.

  • CEO Angus McKay, who took the reins about a year ago, is focusing on the competitive advantages in trade that underpin Bapcor’s narrow economic moat. We expect demand for “wear-and-repair” spare parts, the bulk of Bapcor’s earnings, to remain resilient.
  • We expect demand for discretionary goods, and in turn retail earnings, to recover. Real incomes per capita are finally rising again, and interest rate cuts could further boost consumer confidence and discretionary spending.

Between the lines: Years of noncore acquisitions, particularly in specialist wholesale, have been poorly integrated, introducing complexity and duplication. Bapcor exited or relocated 70 sites, including consolidating smaller warehouses in favor of larger distribution centers.

Bapcor’s trade business underpins its narrow Economic Moat

We expect Bapcor’s strong earnings growth to return as the competitively advantaged trade business capitalizes on favorable industry dynamics. We forecast Bapcor continuing to capture market share in the fragmented trade market as it rolls out stores. We forecast a double-digit EPS compound annual growth rate over the next five years as the business recovers from trough earnings in fiscal 2025, buoyed same-store sales growth of around 2%-3% per year, and growing private-label penetration.

The automotive spare parts industry is resilient. Automotive spare parts, required for routine maintenance and repair of vehicles, are less affected by changes in discretionary income and consumer confidence, and demand is broadly driven by the increasing pool of vehicles. We expect the number of registered vehicles to continue growing at a low-single-digit CAGR over the next decade, roughly in line with population growth. We estimate there are currently around 20 million passenger vehicles in Australia, with an average age of about 11 years. We also argue an element of countercyclicality for auto parts. While maintenance can be delayed to some extent, it cannot be ignored completely. Conversely, we expect new vehicle sales to slow in an economic downturn as consumers choose to maintain their existing car rather than upgrade to a newer vehicle.

We expect Bapcor’s trade business, which contributes the majority of earnings, to continue to capture market share. Bapcor’s trade store network underpins the firm’s narrow economic moat and affords the firm competitive advantages over smaller competitors. This network allows Bapcor to stock over 500,000 SKUs, many of these slow-moving, for over 20,000 different vehicles—an offering that we believe smaller players will be unable to replicate. Bapcor is investing this competitive position, targeting an increase in stores in Australia and New Zealand. We expect Bapcor’s new stores will come at the expense of the competitively disadvantaged smaller players, which we anticipate will make up more than 40% of the market, due to the firm’s ability to provide parts to commercial customers more quickly, reliably, and at a lower cost.

Bulls say

  • The trade segment is highly fragmented, affording significant headroom for Bapcor to capture share at the expense of smaller players.
  • As vehicles become increasingly more complex, DIY customers could gravitate toward outsourcing to mechanic workshops—customers of Bapcor’s higher-margin trade business.
  • A strong balance sheet affords Bapcor the ability to execute its store network expansion and potentially pursue further accretive acquisitions.

Bears say

  • Electric vehicles present a longer-term threat to Bapcor’s business, as they have fewer moving parts.
  • Existing trade customer relationships could be difficult to replace, given their relative price inelasticity, damping Bapcor’s store network expansion plans.
  • A consumer shift to digital sellers (such as Amazon) or more competitive activity from the two larger players in the DIY segment could increase pricing pressure on Bapcor’s retail business.

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