Bapcor: Execution will repair confidence

About the author:

Author name:

By Scott Murdoch

Job title:

Senior Analyst

Date posted:

10 February 2022, 9:00 AM

Sectors Covered:

Diversified Financials, Professional Services

• Bapcor (ASX:BAP) delivered 1H22 underlying NPAT of A$60.7m, down 13.5% on pcp. The result (EBITDA) was in-line with expectations. Despite enduring lockdown impacts in 1Q22, revenue was +2% on the pcp. 2Q22 revenue improved 4% on 1Q22.
• Operating de-leverage (-124bps) impacted, with heighten supply chain and covid related costs. Two small acquisitions (A$50m revenue) have been made in 2H22.
• BAP maintained guidance for NPAT ‘at least’ in-line with FY21. DC targets were reaffirmed, as were the group’s strategy and longer-term targets.
• The board confirmed no takeover approach has been made.
• Market concerns on the recent unexpected management change will likely continue to weigh on the stock. Whilst execution is required, we think the businesses defensiveness should prevail. Trading on ~17x PE, Add maintained.

Event: Solid 1H22 result

BAP has reported 1H22 NPAT of A$60.7m, down -13.5% on pcp, in-line with consensus expectations. The result beat our NPAT forecast by ~6% (in-line EBITDA) on lower depreciation, with the group’s previous FY22 depreciation expectation lowered (to ~A$88m from A$95-100m previously).

Revenue growth of 2% comprised: Retail -0.4%; Trade +3%; Specialist Wholesale +3.8%; and Bapcor NZ +0.4%. EBITDA was down 5.8% (124bp margin compression), with costs incurred from supply chain issues (freight); covid-related costs (staff support and retention); and new DC integration issues.

Divisional EBITDA comprised: BAP Trade A$52m (-9.4%); Retail A$34m (-12.4%); Specialist Wholesale A$47m (+2.4%); and Bapcor NZ A$16m (flat).

Cashflow conversion was weak at 69.4% (84% in pcp). Inventory has been built (+A$39m) to position for demand and mitigate supply chain issues/constraints.

BAP closed with proforma net debt of A$203m, ~1x EBIT. The dividend was +11%.

Guidance and strategy reaffirmed

BAP reaffirmed its FY22 guidance for ‘at least’ flat NPAT (+A$130m). Jan-22 revenue was flat on the pcp (impacted by Omnicom disruptions) and has accelerated into early Feb). Guidance implies 2H22 NPAT of ~A$69m (+13% hoh), which look achievable based on: no revenue and cost impact associated with covid lockdowns; improved margin outcomes from operating leverage and DC improvement; and network expansion (total of 18 new sites were added in 1H22).

Depreciation is now expected at ~A$88m, ~A$10m lower than previous guidance. Whilst this has potentially been interpreted as an implied operating result downgrade (no change to NPAT guidance), several swing factors around supply chains and DC execution remain (which we view as short-term operational issues).

BAP has made two small acquisitions in 2H22, expecting to deliver ~A$50m annualised revenue in aggregate. Acquisition multiples were ‘mid-single’ EBITDA.

BAP reaffirmed its five-year targets, seeking to grow the network to over 1,500 locations (from ~1,100) and increase organic growth of own brand programs.

Forecast and valuation update: minor changes

We make minor EPS changes (<1.5%). Our valuation moves to (login to view).

Investment view: Add maintained

Market concerns around the unexpected management change will likely continue to weigh on BAP; and proof of ongoing execution will be required. Uncertainty and sentiment aside, we viewed BAP’s 1H22 result, underlying performance and outlook as solid.

Trading on ~17x FY22 PE (vs 19.5x average), on what should still prove to be a resilient and defensive earnings base, we maintain an Add.

Risks

Downside: covid interruptions; competition; consumer conditions; acquisition integration; extraction of optimisation/warehouse benefits; failure of Asian growth to meet ambitions; and acquisition under performance.

Upside: M&A; corporate activity; proof of execution under new leadership.

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