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Bapcor finds a spot in Morningstar global best ideas list

Lex Hall  |  05 Jun 2019Text size  Decrease  Increase  |  
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Australian car parts specialists Bapcor has forged a place in Morningstar’s global equity best ideas list alongside global tech giants CenturyLink and Sabre Corp.

Bapcor (ASX: BAP) carries a narrow moat rating - or ten-year sustainable competitive advantage - and a fair value estimate of $7 - a 15 per cent discount to its current price of $5.92.

CenturyLink is trading at a 47 per cent discount, and Sabre Corp at a 28 per cent discount.

Bapcor Limited is Australasia's leading provider of automotive aftermarket parts, accessories, automotive equipment and services.

Its core business is the automotive aftermarket, and its key businesses include Burson Auto Parts, Precision Automotive Equipment and BNT, and house among the widest range of car parts in the world for thousands of vehicle makes and models.

Its trade outlets are located within 5km of each of Bapcor’s 30,000-plus auto workshop customers, with a product range of more than 500,000 items, and a leading market share of about 30 per cent.

“It is extremely difficult for smaller players to offer a similar level of service,” says Morningstar analyst Daniel Ragonese, who tips the company to continue to grow at single-digit pace despite a challenging year for new vehicles sales.

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“The consolidation of the Australian aftermarket auto parts sector is expected to deliver higher returns for Bapcor over the next five years,” Ragonese says.

“We are attracted to the defensive nature of the trade segment, which generates around half of group earnings. Demand is resilient, driven by the total supply of vehicles, which we expect to continue growing at about 2 per cent per year, outpacing population growth.”

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.

Its share price peaked at $7.66 in late September last year, before the broader share market sell-off.

CenturyLink: 'first-rate player in a second-rate industry'

CenturyLink is one of the US’s largest telecommunications carriers serving global enterprises, With 450,000 route miles of fiber, including over 35,000 route miles of subsea fiber connecting Europe, Asia, and Latin America.

Up to 75 per cent of CenturyLink's revenue is from business customers, and the remaining quarter is from the firm's consumer business.

Both businesses posted falling sales in recent years - a trend Morningstar equity analyst Matthew Dolgin expects to continue.

However, Dolgin argues the market has overly punished CenturyLink's stock and is overlooking the firm's substantial free cash flow generation and margin expansion opportunities.

“CenturyLink, in our view, owns a first-rate network in a second-rate industry,” Dolgin says.

“The firm still has synergy opportunities to realise after acquiring Level 3 Communications in 2017, and the shift in sales to more modern technologies results in higher margins. 

“Prices in the enterprise market are deflationary, as technological advances make data transport cheaper and allow software-defined solutions that cannibalise higher-revenue services.

“CenturyLink's copper-based consumer business offers less quality than cable alternatives, and it has been bleeding customers. We expect both trends to moderate but not cease, as the firm is upgrading its consumers to better speeds, and legacy enterprise technologies will gradually make up a lower portion of sales.”

Sabre travelling nicely

Texas-based Sabre Corp is an information technology provider to the nearly US$8 trillion travel industry.

Its software, data, mobile and distribution system are used by hundreds of airlines and thousands of hotel properties to manage operations including passenger and guest reservations, revenue management, flight, network and crew management.

The company’s shares have recently underperformed but Morningstar equity analyst Dan Wasiolek blames this on the market's “misguided concern about accelerated spending in 2019 and issues outside of its control at a few of its IT solution customers”.

“This provides a sufficient margin of safety for investors looking to take a position in this narrow-moat company with network, efficient scale, and switching cost advantages,” Wasiolek says.

“In our view, Sabre's competitive position is intact, evidenced by its growing booking share in the global distribution system industry.

“Further, we believe the push forward of platform spending into 2019 is due to the success the company has seen thus far from its 2017-18 network investments.”

Prem Icon Morningstar Premium members can access the full Morningstar Global Equity Best Ideas List for June 2019


is senior editor for Morningstar Australia

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