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A lot of moving parts: Bapcor tipped to boost market share

Lex Hall  |  01 Jun 2020Text size  Decrease  Increase  |  
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The historic plunge in new car sales caused chiefly by covid-19 has overshadowed Australia’s automotive market but there is some potentially brighter news for parts supplier Bapcor.

Bapcor (ASX: BAP) carries a narrow moat rating—or ten-year sustainable competitive advantage. It is trading at $5.86, an 11 per discount to the $6.60 fair value estimate set by Morningstar analyst Angus Hewitt.

The coronavirus pandemic has hurt Bapcor’s near-term outlook and there remains uncertainty about how its customers, who include independent mechanic workshops, will fare when government rescue measures expire later this year.

However, unlike new cars sales, which fell by a record 48 per cent in April, the aftermarket auto parts industry is seen as resilient, says Hewitt.

“We anticipate the auto spare parts sector should perform well during more typical downturns, as consumers choose to maintain their existing car rather than upgrading to a newer vehicle,” says Hewitt.

Bapcor previously held a fair value estimate of $7.10 but Hewitt has lowered it to $6.60 to reflect lower top-line growth assumptions.

Bapcor, originally known as Burson Group, listed on the ASX in 2014 with an issue price of $1.82 when it had a share market capitalisation of about $300 million.

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These days it has a market cap of $1.9 billion and comprises four business segments: trade, specialist wholesale, retail, and service. Its prominent retail names include AutoBarn, AutoPro and Midas.

Bapcor is expanding its network of stores and Hewitt expects strong earnings growth to persist.

“We forecast an earnings-per-share compound annual growth rate of 8 per cent over the five years to fiscal 2024 as continued expansion of the firm's store network and the increasing fleet of vehicles on Australian roads more than offset near-term headwinds from the coronavirus and the dilutive impact of the recent equity raising.” 

There are 19.8 million passenger vehicles in Australia, with an average age of 10 years. Hewitt expects the number of registered vehicles to continue growing at low single-digit CAGR over the next decade, meaningfully outpacing population growth.

Bapcor’s trade business contributes to the majority of earnings and Hewitt expects it to capture market share from the likes of Supercheap Auto, which is owned by Super Retail Group (ASX: SUL).

Supercheap Auto has made gains in market share recently but this has been largely due to department stores exiting the auto parts business rather than a boost to its competitive position, says Morningstar director Johannes Faul.

And Hewitt contends that Bapcor’s store expansion, which includes outlets in New Zealand and a push into Thailand, will push out smaller players in what is a highly fragmented market.

“We estimate Bapcor’s share in Australia and New Zealand to grow around 37 per cent to 46 per cent, respectively, from about 26 to 35 per cent currently,” Hewitt says.

Bapcor’s competitive advantages include the reach of its network and its speed of delivery. It also boasts in-store expertise, which Hewitt argues could help insulate it from Amazon, which has had limited success in the US and has a negligible share of the spare parts market in Australia.

Bapcor (BAP), Super Retail Group (SUL), Carsales.com (CAR) - YTD

Bapcor v Super Retail Group v Carsales.com - YTD

Downturn weighs on customers

There are, however, risks. And chief among is the damage wrought by the covid-19 shutdown.

Car parts may be a resilient industry but increasing unemployment and lower consumer confidence could weigh heavily on the future of some independent workshops.

Electric vehicles also pose a risk as they require fewer moving parts. While the sale of electric vehicles accounts for just 0.1 per cent of the market, their registrations did double over 2020 to more than 14,000, according to ABS figures released last week.

The coronavirus fallout is also expected to take a toll on retail portal Carsales.com (ASX: CAR), says Morningstar analyst Gareth James.

James has cut his earnings forecasts for the narrow-moat-rated company, and now expects fiscal 2020 underlying net profit after tax to fall by 22 per cent to $101 million, versus his previous 4 per cent growth forecast.

Carsales.com feels covid fallout

Like many other ASX-listed companies, Carsales.com withdrew earnings guidance late last month but provided no meaningful operational update and has not suspended its dividend, James says.

However, traffic to the site, which is a key component of its value proposition, has remained resilient and James is upbeat about the longer-term outlook.

“Carsales.com's first-half result was impressive, the earnings impact in the second half of fiscal 2020 and early fiscal 2021 from the coronavirus-related economic downturn is likely to be severe and we expect second half fiscal 2020 underlying NPAT to be 37 per cent below the previous corresponding period.

“However, despite the significant cuts to our fiscal 2020 forecasts, we expect earnings to rebound during fiscal 2021 and 2022 and the impact on our longer-term forecasts is much lower.”

Carsales is trading in line with its fair value estimate of $16.

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is senior editor for Morningstar Australia

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