A spectacular trading update from
-Strong sales growth and strong margins
-Upside drivers still in place
-Plenty of M&A opportunity
Heading into yesterday's guidance upgrade from automotive aftermarket specialist
The auto aftermarket, which includes parts, accessories, equipment and services, has been a solid covid winner post the early lockdowns in
Aside from simple pent up demand from when stores were mandatorily shut,
In the uncertain economic outlook, Australians have preferred to buy cheaper used cars rather than new. All of the above has led to increasing demand for
Business all but went to nought in March-April but as restrictions eased, sales bounced back hard. The initial assumption was this bonanza would not last, merely reflecting aforementioned pent up demand. But yesterday management revealed retail sales are tracking 40% growth year on year in FY21 to date.
To that end, management has issued first half guidance of 25% sales growth and 50% profit. No full year guidance at this stage given ongoing uncertainty, rather this will be provided at the end of the first half. The gap to profit from sales indicates remarkable operating leverage and better than expected margins.
There are a couple of catches. Margins have been boosted by lower marketing spend and less spending on employee travel. These are assumed to rise back again as the year progresses. However Macquarie expects
And a lower interest cost is expected to be sustained for some time. But there are a few headwinds, including increased freight costs, supply delays and inventory scarcity in a world still ravaged by the virus. And a rising Aussie doesn't help.
Not a flash in the pan
While all agree retail sales growth will ease back from spectacular highs, brokers see only flat growth in the second half rather than any great reversal. Trade demand has recovered more slowly than retail, and provides 80% of earnings. Trade is a structural story, suggests Credit Suisse, given do-it-yourself mechanics is has its limits in today's vehicles. Other brokers concur.
Morgans believes increased car usage and elevated used car sales, increasing the average age of Australian vehicles, will provide lingering demand tailwinds for auto aftermarket activity over periods to come.
Further to margin support,
Thanks to solid organic growth,
Organically,
For investors still uncertain as to whether 2021 should be a year to be defensive or to persist with growth,
As noted,
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