Structural Demand Favours ARB, Amotiv & Bapcor

Australia | Oct 31 2024

New research points to numerous tailwinds for companies in the automotive aftermarket space.

-Structural product demand for ARB Corp, Amotiv and Bapcor in the automotive aftermarket space
-All three have core A&NZ businesses with global upside
-RBC Capital sees greater offshore potential for ARB and Amotiv
-Buy ratings all round for Amotiv in FNArena broker coverage 

By Mark Woodruff

Investors in ASX-listed companies operating in the automotive aftermarket should not be deterred by recent sales declines in key vehicles and negative car dealer commentary, according to RBC Capital Markets, which last week launched inaugural research on three ASX-listed companies in the space.

Weighing opposing forces impacting on industry demand, this broker concludes less kilometres travelled since covid is more than countered by a growing overall market and an increase in older vehicles on the road.

Interestingly, the average age of a motor vehicle in Australia has increased by 60% over the last 20 years to 11.4 years in 2024.

During that time the total number of registered vehicles on the road has grown at a compound annual growth rate (CAGR) of 2.4%, driven by an increasing number of cars per capita and a growing population.

Put another way, less kilometres travelled means less regular servicing and repairs, while an older fleet and the rising population are having the opposite and greater impact.

The net outcome is a tailwind for the likes of ARB Corp ((ARB)), Bapcor ((BAP)) and Amotiv ((AOV)), formerly named G.U.D. Holdings, which have market caputalisations of $3.4bn, $1.6bn and 1.5bn, respectively.

A further tailwind is via the current consumer trend towards higher independent and chain mechanic usage, explains RBC, particularly benefiting Amotiv and Bapcor.

For example, Bapcor's Trade segment focuses on automotive aftermarket parts distribution for these independent and chain mechanic outlets, notes Macquarie.

Recent trading updates for ARB, Amotiv, and Bapcor revealed only a slight miss for sales growth in the September quarter against expectations, resulting in moderate EPS downgrades by broker Morgans.

FNArena covered ARB's result at: https://fnarena.com/index.php/2024/10/21/arb-investing-for-us-growth/

Nominating Amotiv as its favoured exposure in the sector, this broker assured investors stronger second half skews for earnings are in prospect for all three companies.

Both Amotiv and top pick ARB are rated Outperform by RBC partly because of recent initiatives involving a pivot towards international markets with much larger penetration potential.

In agreement, Wilsons recently suggested ARB is well placed to capitalise on the structural shift toward 4WD vehicles and the significant market opportunity in the USA, underpinned by a broad range of growth initiatives across product and distribution.

Analysts in general were pleased by management's recent effort to widen distribution of 4WD accessories into the US, and, in a separate deal, pick-up a local US brand with more potential appeal to the US consumer than its own legacy brand.

Regarding Amotiv's international aspirations, RBC is confident in the 4WD Accessories and Trailering (4WDAT) strategy given a strong market position and recent South Africa expansion. where the broker sees additional upside from incremental contract wins.

The broker observes the market appears less confident in Amotiv's Lighting, Power and Electrical (LPE) division expansion relative to the estimated size of the opportunity.

This division (which includes well-established brands like Vision X and Projecta, known for their high-quality lighting products, power inverters, and battery chargers) plays a key role in Amotiv's international expansion strategy, particularly targeting the North American and European markets.

Along with the burgeoning international expansion for Amotiv and ARB, one factor providing an edge relative to Bapcor is a higher proportion of products tied to fuel-agnostic vehicle types, RBC highlights.

The analysts also remind investors of ARB's strong market position and demonstrated track record of outperformance, which should provide insulation against the recent decline in Australian new vehicles sales.

Summary comparison points

For comparative purposes, and as an aid to reading the more detailed summaries of ARB, Amotiv, and Bapcor in the following section, below are the key factors as identified by RBC Capital's sector analysis:

-Rising usage of SUVs and light commercial vehicles - good for ARB and Amotiv
-Fewer new car sales - positive for ARB and to a lesser extent Amotiv (AutoPacific Group division revenues tied to new vehicle sales) due to more servicing and repairs. A key driver of growth for Bapcor are older cars
-Fewer new car sales (yes, this is a repeat) - negative for ARB and to a lesser extent Amotiv as accessory fitment rates tend to be highest for new cars

Overview of market players

ARB, Amotiv, and Bapcor operate their core businesses in the A&NZ market which, as highlighted by RBC, is defined by global leading car ownership metrics and steady growth.

For ARB, Wilsons remains confident of sustained sales growth, with drivers including the ongoing structural shift to SUVs, new vehicle model releases, expanded distribution, and new product launches including in collaboration with original equipment manufacturers (OEMs).

The company specialises in the sale of premium accessories for 4x4 vehicles. Its premium product range commands a strong brand loyalty from the customer base given quality and durability are non-negotiable when off-roading, explains RBC.

The vertically integrated and global operations distribute into over 100 countries.

The analysts believe management is well placed to drive growth with increased control of retail distribution, expanded logistical capacity and a growing reputation following collaborations with the second largest OEM by sales (Toyota) in the USA.

Already, RBC notes, ARB has the highest organic CAGR relative to peers.

For Amotiv, Wilsons likes the core exposure to resilient earnings from 'wear & repair' activity coupled with attractive growth opportunities across auto electrical and 4WD accessories.

The company's strong brand portfolio and market position also bolster the investment case, in this broker's view.

RBC describes Amotiv as a leading manufacturer, wholesaler and distributor of automotive products, which has become increasingly diversified through a series of strategic acquisitions.

The AutoPacific Group segment, a core part of the company's automotive portfolio, is focused on manufacturing and marketing products like towing, trailering, and functional accessories across A&NZ

By comparison, Bapcor engages in the sale and distribution of motor vehicle parts and accessories, automotive equipment and services, and motor vehicle servicing at approximately 1000 sites across the A&NZ region and Thailand.

Bapcor's operating segments are Trade, Bapcor New Zealand, Specialist Wholesale, and Retail.

RBC believes there is additional potential upside from further rollouts and greater private label penetration in the Retail and Trade segments. Penetration rates remain below key comparable companies in the US such as O'Reilly Automotive and AutoZone.