GUD Holding’s portfolio has changed significantly over the years to the point where shareholders from even just a few years ago may not recognise it. With two big recent acquisitions, the company is now dominated by auto products and arguably can no longer be called a conglomerate.
With nine acquisitions in the automotive aftermarket parts industry since FY15, including the $745 million acquisition of AutoPacific Group (APG) in November 2021, GUD has transformed the business into a diverse and well regarded auto aftermarket business. We estimate GUD has grown its auto EBIT from $32 million in FY15 to $215 million by FY23f. While much of that growth is from the acquisitions, we estimate about $30 million of the incremental EBIT is from organic growth. Over this period, GUD has invested approximately $1.2 billion in acquisitions and capex in the auto business.
GUD’s vision is to become a leader in 4WD accessories and trailering in Australia and New Zealand with an eye on future export potential. The APG acquisition goes a long way to fulfilling that ambition.
By 2025, GUD is flagging six strategic imperatives:
- Build an integrated leader in 4WD and trailering
- Grow a global leadership position in Auto Lighting
- Expand vehicle power management internationally
- Become a leader in the ANZ electric vehicle aftermarket
- Capture undercar categories
- Optimise powertrain profitability and invest in adjacencies
APG was the most recent and also the most significant of GUD’s acquisitions. It creates scale in the 4WD category which has an addressable market in Australia of around $1.8 billion. GUD is now the clear number two player in Australasia with an end-to-end product range covering lighting, powertrain and protection to towing and trailering. APG is the dominant towing products business with around 85% market share so in a market where half of all new vehicles sold (in Australia) are SUVs, this is an attractive growth business.
Wander through just about any caravan and trailer yard and you will find the Hayman Reese hitch on many vehicles or the Cruisemaster suspension and coupling systems built for unforgiving Australian offroad conditions. Vehicle protection equipment such as bull bars, driving lights, brakes and cargo management all form a vital part of any serious 4WD setup.
Power management systems such as dual battery systems, inverters, solar panels and battery chargers are all basic elements of modern camping adventures, so APG’s Projecta brand is highly popular in this category.
In October 2021, GUD announced the acquisition of Vision X for US$53 million from its US and Korean founders. This lighting business is complementary to GUD’s BWI business with product development and manufacturing facilities in Korea and China together with sales, product development and warehouse/manufacturing facilities in the US. The product range spans LED lights and light bars for 4WDs, marine, work lights, commercial and specialty lights. It also spans just about any industry where LED lighting is appropriate, particularly for vehicles.
GUD acquired Vision X with an upfront payment of US$52.8 million and an earnout provision out to November 2024 which could see an additional US$8.8-16.8 million paid by GUD.
The remnants of GUD’s ‘old’ portfolio is now just the Davey pumps business which currently accounts for about 15% of group assets and 5% of EBIT in FY21. Davey generates about 80% of its revenue in Australia and has a 10% market share. Profitability and returns have steadily declined in recent years to the point where it is now a weak strategic fit for the group and potentially could be sold.
The APG acquisition was funded by a $405 million equity raise, plus $282 million of debt and $75 million of new GUD script issued to the vendors who will own about 4.6% of GUD. GUD’s pro forma net debt to EBITDA at 31 December 2021 was 2.5x but is expected to improve to less than 2.0x by the end of CY22.
Investment view
The integration of Vision X and APG will take some time as well as the focus on working capital and debt within GUD. The next year or two will be important to nail down these acquisitions and get a full contribution to GUD’s portfolio.
The key risks in GUD relate to operational and economic conditions, together with competition. Supply chain issues are an important factor as GUD remains heavily reliant on imports.
The Australasian aftermarket is dominated by two large resellers in the trade channel – Bapcor and GPC (Repco/NAPA). GUD has a long track record with its resellers but we are cognizant of their market positions that could impact on pricing, volumes and payment terms.
GUD’s gross margin and EBIT margin are distinctly higher than its overseas peers so we see potential pressure on these metrics over time given the relative strength of GUD’s key domestic customers.
GUD’s current consensus PE ratio of ~16x FY22 eps is in line with its 5-year average although the composition of earnings has clearly shifted.
Despite the risks, GUD offers investors exposure to defensive end-user demand, a clearly defined strategy and quality management. We note the 21% recovery in the share price since just prior to Christmas but we think there is more on offer as this business evolves.
On balance, we initiate our coverage of GUD with a Hold recommendation.
