Result overview:
Underlying EBITDA +27% to $191m
Underlying net profit +33%, underlying EPS +8.4%
Final dividend 22cs (full year 39cps, 53% payout)
FY23 result. A much busier FY23 as vehicle owners spent more on their vehicle maintenance and parts has pushed GUD’s result into real growth territory. The integration of APG has required some investment but it is shaping up to make a material contribution.
The recent sale of the Davey water products (pumps) business for $64.9m is expected to complete on 1 September 2023. This makes GUD a pure automotive business.
Inventory reduced $31m on last year helping cash conversion to 113% as supply chain issues that plagued FY22 disappeared. The balance sheet has net debt to EBITDA of 2.0x in line with group target.
The core Automotive segment (ex APG) ticked all the boxes with new customers, new products, network expansion and revenue growth of 8.7% to $453m. APG added $181m revenue in the year so that total Automotive revenue now sits at $634m. Underlying Automotive EBITA grew 7.4% to $139.6m with a small slip in margin to 22.0% although the exit run rate is improving.
APG was acquired for $745m in January 2022 and is the market leader in towing accessories in Australia. APG is expected to contribute ~30-35% of GUD revenue and 35-40% of EBIT on a pro forma basis. Demand remains strong as wait times for delivery of vehicles is still elevated. APG’s activity will begin to flow better once this constraint eases. The volume of vehicles in APG’s target segment is still growing strongly as new models appear (Toyota Landcruiser 300 and others) enabling GUD to build product breadth and revenue. In this regard, GUD is competing with ARB and BAP (both Buy rated) but we see market growth providing room for all companies to grow.
Outlook.
The emergence of electric vehicles is drawing much attention in the automotive sector, but sales of internal combustion engine vehicles remains dominant and still growing in Australia. GUD has launched its Infinitev brand (a clever name, in our view) with facilities in Melbourne and Auckland. It will re-purpose EV batteries into energy storage systems with the help of some government grant assistance. This will position Inifinitev nicely for the looming wave of EV batteries nearing the end of their useful lives. This aligns perfectly with GUD’s positioning at the mid to tail end of vehicle lives where maintenance peaks. This business is small potatoes for now, but logically should grow into something much bigger.
Early FY24 trading is above last year as supply constraints continue to ease although APG’s top 20 brands are not expected to normalise until late FY24.
Investment View
The Australian car parc could reach 22.4m vehicles by CY28 according to various industry sources. GUD’s target market is vehicles older than 5 years (outside new car warranty) which currently amounts to approximately 14m vehicles. The average vehicle age in Australia is around 13 years and is older than previous years. This is fertile ground for repairs and maintenance which is GUD’s bread and butter. In addition to ‘wear and tear’ replacement parts. Many older vehicles have ‘upgrades’ that also require maintenance or replacement creating a further source of revenue.
GUD sees ‘powertrain proliferation’ (EVs of all types) as a positive noting that three-quarters of revenue comes from parts and service that are not dependent on what type of engine is under the hood.
At ~13x FY24 PER, GUD is trading much cheaper than peers ARB 25x and BAP 16x. Each occupies a slightly different part of the automotive spectrum although we acknowledge there is overlap. Our positive view on the unwinding of supply constraints on the new vehicle market plus the ageing of Australia’s older car parc provide ample room for GUD to extend its growth path.
Risks to Investment View
The volume and trajectory of vehicle sales, both new and used, across Australia, are correlated with activity in GUD's business. If demand for vehicle accessories changed, this would impact GUD's earnings.
Recommendation
We retain our Buy recommendation.
