Something is amiss at Bapcor where the highly successful, long-serving CEO has been ousted prematurely from the role due to a “marked deterioration” between himself and the Board over unspecified cultural issues at the company. The business itself is in good shape with multiple catalysts supporting a positive view of the company.
Darryl Abotomey has led BAP since September 2011, through the IPO in 2014 from a $300 million market capitalisation to the current $2.27 billion level. Net profit has risen from $19.4 million in FY14 to $130 million in FY21 under Mr. Abotomey’s leadership.
In corporate terms, a CEO tenure of more than ten years is unusual but not unacceptable, particularly if shareholder returns are more than adequate. So, the revelation that the Board and CEO had commenced succession planning at least a year ago which resulted in the CEO agreeing to an extension of his contract to October 2023, was a very straightforward exercise.
An executive search firm had been engaged to assist the Board in finding a suitable replacement.
But since that time, the process has hit a large pothole causing the Board to initiate an externally driven review of the company’s culture. Some conflicting messages from the company only served to confuse the matter but it seemed clear that Mr. Abotomey had fallen foul of the newly appointed Chair and her Board of Independent Directors.
The situation now is that Mr. Abotomey has been ejected immediately with the Board’s initial choice of interim CEO, Board member Mark Powell, unable to assume the role. Instead, CFO
Noel Meehan has been asked to take over while the CEO search continues.
From an investor’s point of view, this is a serious concern and would normally persuade us to tread with caution. The Board has every right to explore the (unexplained and unspecified) cultural issues it deemed sufficiently serious to seek external advice, but all it has achieved so far is to create uncertainty around the company. The share price fall of 20% since the announcement of Mr. Abotomey’s early retirement in February 2022 (now immediate) is clear evidence of that.
But turning from the management uncertainty towards what we do know about BAP’s underlying business is a much more encouraging story.
BAP’s estimated 28% share of the Australian trade market is underpinned by a highly strategic network of assets including more than 200 Burson Trade stores. The company has a robust balance sheet with net debt to EBITDA at less than 1x and this provides support for expansion capex and potential acquisition activity. The well-defined 5-year strategy offers significant upside across the domestic store roll-out, private label growth and supply chain optimisation. There is vertical growth into commercial vehicles and geographic expansion into Asia.
Investment view
The obvious caveat to our retained Buy recommendation is a satisfactory resolution to the appointment of a new CEO. BAP has reiterated FY22 guidance for net profit to be at least the level of FY21, assuming no further lockdown impacts. The share price fall has provided an opportunity to accumulate stock.
