Bapcor: Reliable as always

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Former Senior Analyst
Date posted:
19 August 2021, 9:30 AM
Sectors Covered:
Consumer Discretionary (Retail)

  • Bapcor's (ASX:BAP) FY21 result provided a slight beat vs MorgansF/consensus (2%).
  • 20% revenue growth converted to 39% growth at EBIT with strong operating cost leverage flowing off the top-line momentum.
  • We forecast flat NPAT growth in FY22 vs management guidance of ‘at least’ in line with FY21. Essentially we forecast solid growth in most divisions (excluding Retail) offset by a decent step-up in D&A.
  • BAP’s balance sheet looks comfortable and capable of funding its capex commitments and dividend while also providing flexibility for modest M&A.
  • Our EPS forecasts are largely unchanged while a higher capex profile sees our DCF/PE valuation nudge down to (login to view). Hold rating maintained.

FY21 result – 47% NPAT growth

BAP’s FY21 result came in slightly ahead of consensus with 20% revenue growth converting to 39% EBIT growth and 47% at NPAT.

Divisional insights: Trade – rev/EBITDA +15.5%/19%; NZ +8.8%/21.2%; Spec. Wholesales +26.8%/42.2%; and Retail +26%/20%. Of note, retail margins declined considerably in the 2H as management consciously re-set pricing lower.

BAP exited FY21 in a A$160m net debt position (0.7x EBITDA) while cash conversion (74%) was impacted by a planned working capital build.

Outlook – lockdowns hurt in the short term

Rolling lockdowns have impacted trading in the short term, with regions like NSW seeing a +20% impact in Trade and 20-30% in Retail.

BAP expects FY22 earnings (pro-forma NPAT) to be ‘at least’ in line with FY21.

On an underlying SSS growth basis (excluding lockdowns), retail comps are negative (as expected given extreme base to cycle) while Trade is modestly positive (a solid outcome).

BAP is seeing material price inflation via its supplier base in addition to freight. While some of this is being absorbed, BAP continues to pass this cost on via price.

Our forecast thinking

Given D&A guidance of >A$95m in FY22 (+A$17m), a flat NPAT outcome requires c6% EBITDA growth in FY22. Our forecasts sit in line with this. Management’s guidance rhetoric is clearly intimating a higher result than this.

In terms of divisional EBITDA growth in FY22, we assume Trade +5%; Retail -5%; NZ +6%; and Spec. Wholesale +6%.

Given lockdowns, predominantly in NSW, will impact a bulk of 1H22 and with stronger comps to cycle (and margins in Retail), we see a likelihood 1H earnings falling on the pcp. However given the resilience of the business, a 2H recovery is likely.

Investment view

We make negligible changes to our EPS forecasts following today’s result and outlook commentary. We have increased our capex forecasts and slightly lowered our dividend payout assumption (to 55% from 60%).

Our DCF/PE valuation ticks down to (login to view).

With the stock offering <10% TSR vs our valuation/yield forecast, we maintain a Hold rating.

BAP is a defensive business with a reasonable growth trajectory. With think this is encapsulated at the current valuation (20x).

Risks

Downside: COVID-19 interruptions; competition; consumer conditions; acquisition integration; extraction of optimisation/warehouse benefits; failure of Asian growth to meet ambitions; and acquisition underperformance. 

Upside: M&A; corporate activity.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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