Bapcor has outlined a range of targets in order to fulfil its expansion ambitions, particularly in Asia, with a focus on increasing the penetration of its own brand

-Sales growth to be driven by core trade automotive parts business
-Demand tailwinds should linger for aftermarket automotive parts
-Growth ambitions outlined for Bapcor in Asia, including Tye Soon
 

Bapcor ((BAP)) has provided a strategic update, revealing a number of long-term growth opportunities, and outlined a range of numerical and financial targets. The company is furthering its ambitions in Asia while increasing penetration of its own brands, which should generate higher margins.

The main growth drivers, Citi observes, include the store roll-out within trade & retail, private-label & specialist wholesale expansion, and the international roll-out supported by the Thai joint venture as well as the recent acquisition of the 25% stake in Tye Soon.

Ord Minnett notes access to automotive parts in Asia will increase the total addressable market for Bapcor and offer significant upside, and expects earnings growth to be driven by underlying demand and sales growth in the core trade automotive parts businesses as well as expansion of the store network in Australasia.

The company recognises the supply chain requires optimisation, given the increase in the network, and the consolidation of distribution outlets will realise $10m in savings as well as $8m in working capital efficiencies.

Consolidation of the Queensland warehouses, which total seven, is being evaluated on a similar basis to the consolidation being undertaken in Victoria. Bapcor has lifted store targets across most segments. Increases in own-brand penetration have been the main driver of margin expansion in recent years, and Morgans was pleased to note heightened ambitions on this front.

The broker believes the benefits of increased usage of motor vehicles and elevated used car sales will mean demand tailwinds linger for aftermarket activity and Bapcor is offering an attractive mix of growth and defensive attributes.

Citi notes private-label penetration in the second half to date has stayed broadly flat, likely a function of strong sales growth for the group as a whole. Still the company's strategy appears to be on track and the broker flags the fact US automotive retail peers have higher private-label penetration.

The attraction in private label products is higher margins as well as greater bargaining power with branded product suppliers. It also provides greater control over pricing and stock and a point of differentiation relative to competition.

Targets

Store targets have increased, with 260 Burson trade stores now anticipated in Australia, up from 240. The target is 90 BNT stores in New Zealand, up from a former target of 75, and 165 service workshops, up from 150.

The target for own-brand sales at Burson is raised to 40% and 45% for BNT. The own brand target has also been lifted for the retail stores Autobarn and Autopro, to 45%. Citi notes Autopro, a smaller format for regional areas, is likely to have an increased focus going forward as Bapcor implements initiatives to improve efficiency.

Yet the broker suggests the company should provide more disclosure for the market regarding this business, in order to better model the opportunity.

In specialist wholesale, the $650m revenue target is unchanged while the percentage of own brands has been raised to 65%. The company is aiming for $340m in commercial sales, also unchanged. Citi considers the revenue targets for both these segments reasonable, given the roll-out potential in commercial vehicles.

Asia

The main new piece of information was the outlining of growth ambitions in Asia. Turnover targets in Thailand have been maintained at $100m while the target for the number of stores has been downgraded to "over 60" from "over 80".

The total Asian revenue target is $500m over the next five years which includes around $200m from Tye Soon. Morgans considers the revenue target for Tye Soon a "stretch" and Bapcor's ability to reach it will rely on taking full control of a listed entity.

Citi observes the pandemic has slowed the roll-out in Thailand, noting a reduction in the five-year target, as travel restrictions have adversely affected Bapcor's capacity to support local management with site selection and due diligence.

Still the potential is there and the broker calculates there will be around 267,000 motor vehicles per store when Bapcor reaches its roll-out target. This is three times the number of motor vehicles per store in Australasia.

FNArena's database has six Buy ratings and one Hold (Morgans) for Bapcor. The consensus target is $9.13, suggesting 8.6% upside to the last share price.

See also, Bapcor Steering Earnings Growth Beyond FY21 on April 21, 2021.

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