Bapcor’s new-ish CEO has launched the blandly titled program “Better than Before” to signify a changed mindset at the company. Perhaps some things did need to change in order to convince the market to value the stock more like its US peers, but the plan is undergoing a long gestation and is yet to be hatched.
CEO Noel Meehan assumed the permanent role in February this year after a bungled process had ousted former market favourite, Darryl Abotomey. It has therefore taken a good deal of time for the dust to settle, but also a lengthy period of prognostication before Mr Meehan has come up with a plan to improve the business.
The argument posed is that the old BAP had a mindset of ‘growth at any cost’ which has seen the company’s market capitalisation lift from $329 million when BAP listed in April 2014 to $2.3 billion today.
Details of the new plan will be revealed at BAP’s new Melbourne DC at an Investor Day in November. In the meantime, shareholders will have to take comfort that FY23 has got off to a ‘good start’ as the company helpfully revealed at the FY22 result announcement.
Underlying FY22 net profit inched ahead by 1% to $132 million, helped along by a brisk 2H22. Bapcor Trade, Specialist Wholesale and Retail and Service all rebounded vigorously with improved aftermarket volumes and price increases. The Australian automotive aftermarket has been enjoying a prolonged period of growth as the sale of (proper) SUVs and 4WD vehicles has become the dominant part of the car parc. Business has been so brisk that BAP ramped up its inventory by $97.9 million as a safeguard against global supply chain disruption. The increase is expected to be temporary as demand will eventually draw down on the excess stock this year.
BAP’s store network has continued to expand with a footprint of over 400 retail outlets (Autobarn, Autopro, Midas and ABS and Opposite Lock) and a 204 store network of core Bapcor Trade stores. The operating performance of BAP’s divisions is under the microscope with BAP’s EBIT ROIC (return on invested capital) and net profit margin largely stalled over the last five years. From what we know so far, the new plan is looking at improving efficiency, cleaning up the supply chain and finding some cost savings. The goal is to lift BAP’s operating margin from the group level of around 11% which is approximately half the level of its US peers.
Investment view
No qualitative guidance was provided for FY23f guidance and the new “Better than Before” plan has a very fuzzy timeline and no details, so far. Phase 1 of the plan is simply about the diagnostics, but all will be revealed, in good time.
BAP has generally been a good business for most of its listed history, but we acknowledge there is always room for improvement. We are willing to wait for the new plan and genuinely hope that the efficiency gains and profitability improvements being sought can translate to higher earnings. The corollary to that is (usually) a higher valuation.
Risks to investment view
Demand for automotive parts may vary and changes in economic conditions could affect earnings growth for the company. The automotive parts market is competitive, and the broad array of suppliers can affect operational efficiency.
Recommendation
We have retained our Buy recommendation.
Figure 1: FY22 result
