Peter Warren Automotive: Rolling over the lockdown bump

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
28 October 2021, 8:00 AM
Sectors Covered:
Diversified Financials, Professional Services

  • Peter Warren Automotive (ASX:PWR) upgraded 1H22 NPBT expectations to A$32-34m (from its A$28m prospectus forecast). 1H22 (mid-point) is +23% on the pcp and down 32% on 2H21.
  • PWR noted QLD results have been above expectations, and NSW customer activity is encouraging post lockdowns lifting. The order book at Sept-21 is higher vs June-21, setting up for a stronger 2H22 performance.
  • Vehicle supply poses some short-term risk, but supply dynamics should improve through CY22. Medium-term gross margin outcome will remain one of the key areas of focus into FY23+.
  • The consolidation opportunity for PWR provides a runway for meaningful growth and PWR has the balance sheet capacity to execute on it. Trading on ~10.6x FY22F and ~12.7x FY23F (assumed margin contraction), we maintain an Add rating.

Event: 1H22 guidance solid given lockdown impacts

PWR provided updated 1H22 guidance, upgrading previous (prospectus) expectations of A$28m to A$32-34m. PWR had previously maintained a conservative position in Aug-21 given lockdown uncertainties.

The group stated that 1Q22 results for QLD were stronger than expected and demand in both QLD and NSW has remained strong. Deliveries in NSW have clearly been impacted by lockdown restrictions, which have now eased (show rooms open as of Mid-Oct).

PWR’s order book at Sept-21 was above June-21 levels (not quantified). PWR noted that uncertainty around vehicle supply remains (some marginal risk to 1H22), but we expect this to improve through CY22.

PWR’s higher order book and the end of lockdown restrictions in NSW set the business up for stronger 2H22 performance.

Consolidation remains the longer-term driver

PWR is in the process of securing a A$96m debt facility (secured against the Warwick Farm property assets) to support the growth strategy. As at June-21, PWR had no corporate debt and net cash of ~A$43m.

The group noted there is a ‘positive’ pipeline of opportunities with vendor pricing expectations consistent with previous acquisitions.

Forecast and valuation update

We upgrade FY22 EPS by 18.8%. We forecast FY22 PBT of A$70.6m, implying 2H22 PBT of ~A$37.5m. This may prove conservative (depending on supply/deliveries) given the A$48.8m PBT delivered in 2H21.

Our outer year forecasts are relatively unchanged (+/- 1.2%), which factor in gross margin contraction as supply conditions improve.

Our PE/DCF valuation moves to (login to view price target). Our PE valuation is rolled forward to FY23 EPS.

Investment view

Add maintained. Whilst we expect elevated gross margins to contract at some point (forecast from FY23, but this may push further out), we see the consolidation opportunity as providing a solid runway of growth.

Based on our current forecasts, PWR is trading on ~12.7x FY23. Our forecasts include a reasonable re-basing of earnings from FY21/22 levels. Accretive acquisitions of scale have the potential to move the dial materially, which are not factored into our forecasts.

PWR’s balance sheet position (net cash and ability to gear against ~A$230m property portfolio) provide the capital capacity to execute.

Price catalysts

1H22 result – further detail around the forward order book, M&A pipeline.

Risks

Downside: supply outpacing demand, deteriorating demand/consumer sentiment/house prices (downturn in car sales), deterioration in supply impacted demand and delivery, industry model operating changes, inability to identify/integrate acquisitions (key growth pillar).

Upside: continued demand strength (outstripping supply); M&A.

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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.

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.

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