Group revenue of $1.0bn was 5% above consensus, with EBITDA and NPAT broadly in-line. One-off costs and elevated inventories resulted in a fall in cash conversion to ~68% (down from 69% in 1H22 and 84% in 1H21) however management expect this to improve. BAP declared a 10.5cps dividend, up from 10.0cps.
Trade and retail driving the result. Trade continued its strength, growing revenue 15% with a strong increase in same-store sales (+12%). Margins were stable as active pricing management offset cost inflation. Retail grew 11.5% driven by 10.2% growth in same-store sales, however margins were temporarily compressed due to cost pressures and the ongoing conversion of franchise to company stores. The new supply chain distribution centres are also expected to contribute an annual EBITDA benefit of $4-$6m during 2H24.
NZ troubles. Revenue was flat despite a 6% growth in same-store sales, as servicing and repair volumes due to elevated fuel costs were reduced. Profitability was impacted due to supplier and internal cost inflation not fully recovered. The result here was a -17% miss on consensus numbers, and the margin recovery is currently not clear.
Transformation goals. BAP quantified parts of its “better than before” strategy, outlining a target of >12% average ROIC over FY23-25, up from ~10% in FY22. The >$100m net EBIT benefit remains in place.
Strong balance sheet. Net leverage ratio of 1.45x is comfortably within its range and BAP has >$100m of undrawn committed facilities.
Unchanged outlook. Management continues to expect ‘solid’ underlying performance, with slight improvements in trading in 2H23 compared to 1H23, although note more progress required to reduce still elevated inventory levels.
Investment View
BAP’s result is resilient considering the softer macro backdrop with strong albeit mixed margin performance across its divisions. BAP has an incredibly difficult to replicate store footprint, providing a competitive advantage in a relatively non-discretionary industry. The company has moved into the implementation and execution stage of its business transformation.
We expect the New Zealand business to remain under pressure, however the remaining divisions continue to grow with clear pathways to margin recoveries, and a strong balance sheet provides opportunity for M&A or capital management. BAP is currently inexpensive, trading on a PER of ~15x compared to its longer-term average of ~19x. We retain our buy recommendation predicated on continued earnings recovery momentum and valuation upside.
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: Margin compression across the group, NZ particularly impacted in the half
Figure 2: BAP trading more than 1SD below its 5-year average PER
