Bapcor: Enough in the tank
About the author:
- Author name:
- By Scott Murdoch
- Job title:
- Senior Analyst
- Date posted:
- 20 October 2021, 9:30 AM
- Sectors Covered:
- Diversified Financials, Professional Services
- BAP’s 1Q22 revenue was flat on the pcp, with solid Specialist Wholesale growth (7%) offset by the Retail division down ~12% (~70% of stores lockdown impacted).
- Some GM pressure (50bp decline vs pcp) and a higher cost base is impacting, although BAP expects margins to revert once lockdowns ease.
- FY22 guidance has been maintained for earnings to be at least at FY21 levels, with a 2H22 earnings skew noted. We expect 1H22 to be down significantly on the pcp, impacted by operating deleverage in lockdown divisions.
- We are somewhat cautious of the market’s reaction to a weak 1H22 result in Feb-22, however in our view BAP’s 1Q22 revenue showed the resilience of the group and potential once nomalised operating conditions fully resume. We upgrade to Add, with sufficient upside to our valuation having emerged.
Event: 1Q22 trading update at AGM
Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations.
1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%).
Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%.
Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming.
GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease.
The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.
Outlook: Guidance maintained
BAP reaffirmed guidance, expecting to deliver pro-forma earnings “at least at the level of FY21” (A$130.1m). Guidance assumes no lockdowns in 2H22. BAP noted 1H22 will be softer vs pcp with 2H22 above pcp (FY21 NPAT skew was 54%/46%).
We expect the 1H22 result to be materially below pcp (~15% at this stage), which incurs higher group overheads, increased and duplicated DC costs and the impact of material operating deleverage in 1Q22 (which potentially prolongs into 2Q22).
However, we are willing to look past the 1H22 result, given the resilience shown in 1Q22 revenue; improving conditions to come with lockdowns easing assisting revenue and operating leverage; improved efficiency to come from DC consolidation; and longer-term geographic expansion and acquisitions.
Forecast and valuation changes
Our forecasts are effectively unchanged. Our valuation lifts to (login to view price target) after rolling forward our PE valuation to FY23.
We upgrade to Add with BAP offering ~13% TSR based on our slightly upgraded valuation.
Whilst currently trading on a reasonable multiple (~20x FY22), BAP continues to prove its earnings defensiveness with solid organic/inorganic growth prospects over the medium-term.
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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