The result demonstrates the resilience of the aftermarket and the strength of the non-discretionary products within the Automotive (ex APG) business. On an underlying basis, 1H23 EBITA of $90m and NPATA of $56m were broadly in-line with consensus. The ‘Core’ Auto segment delivered 10% revenue growth and 9% EBITA growth, with pricing offsetting fx headwinds and cost inflation. Cashflow was weaker than expected (~76% EBITDA conversion) however management remains confident of achieving ~2x ND/EBITDA by June 2023, with the medium-term target being 1.6x-1.9x.
Restarting the engine. Management have called out solid start to 2H23 across all divisions. In APG, the new Ford Ranger continues to be a key driver, with revenue per unit 2-3x higher than other models contributing to a favourable mix shift. OEM purchase orders are still constrained due to component supply constraints. GUD is expecting continued recovery and is confident the original business case targets of EBITA approaching $82m can occur ($25.1m in 1H23).
Solid core. 10% organic revenue growth in the ‘core’ (Ryco, Wesfil, BWI etc) auto segment was underpinned by end-user servicing demand and market share gains, according to GUD estimates. The addressable market continues to grow ~3%pa with unit growth and ageing fleet supporting a mid-single digit revenue growth profile on a medium-term view. In the acquired Auto segment, the G4CVA business continues to be under pressure on the lack of skilled workers. Returning this business to growth could drive ~5% uplift to group EBITA.
Investment View
The solid start to 2H23 provides us confidence that the return to growth is back on the main road. As OEM supply chains normalise and favourable mix trends continue, the business can deliver growth, assuming no deterioration in vehicle supply. An increasing average vehicle age should see robust aftermarket demand, and strategic pricing initiatives should see GUD maintain its margins.
Trading at just ~10x earnings, GUD is incredibly cheap and has significant valuation upside. An improving leverage ratio underpinned by strong cashflow as well as underlying earnings momentum should see the stock re-rate. We retain our buy recommendation
Risks to Investment View
The volume and trajectory of vehicle sales, both new and used, across Australia is correlated with activity in GUD’s businesses. If demand for vehicle accessories changed, this would impact GUD’s earnings. 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: Core Auto delivering strong growth, APG expecting 2H23 EBITA uplift
Figure 2: GUD trading well below its 5-year average PER
