Outlook For Burson Driven By Strong Demand

This story features BAPCOR LIMITED. For more info SHARE ANALYSIS: BAP

-Several drivers underpin the stock
-Valuation too rich?
-Plans to increase gross margins
 

By Eva Brocklehurst

Automotive aftermarket parts is a steadily growing market, driven by rising numbers of vehicles in Australia. Burson Group ((BAP)) is well placed to take advantage of this market, having acquired Aftermarket Network Australia last year, expanding its coverage of wholesale, retail and chain workshops.

Macquarie takes up coverage of the stock with an Outperform rating and $5.03 target, citing several growth drivers for the industry including population and demand growth as well as the increasing value of parts.

Another driver of the automotive aftermarket parts is the age mix of the Australian vehicle fleet. This is important, the broker contends, as most aftermarket parts are used to service vehicles that are over four years old. Average growth in vehicles over five years old has been 2.0% over the most recent decade, the broker observes, with the proportion of the fleet over this age rising to 69%.

Increasingly, vehicle complexity has also made it more difficult for the do-it-yourself owners to service, and complexity of parts makes it easier and cost effective to replace rather than repair them. Macquarie expects this trend to persist, with younger people less keen or able to repair their own vehicles.

While there are no statistics for automotive aftermarket part prices, there is evidence that locally manufactured prices of parts grew 10% in 2015 largely, in the broker's view, because of the depreciation in the Australian dollar and the impact on imported prices.

The broker does caution against relying too heavily on these prices as the vast majority of parts are imported into Australia. Pricing of parts is generally viewed as a non-discretionary component of a workshop invoice and passed onto the consumer by both the distributor and workshop.

Morgans also observes the company has clear view on where its sources of growth will be over the next five years, and considers Burson's presence across the supply chain augurs well for success.

Macquarie concedes the stock's valuation appears rich but observes two precedents: valuations achieved by early stage roll-out stories, which have consistently traded at a price/earnings (PE) ratio of 20-25, and international peers that are trading at PEs as high as 23 times 2017 earnings forecasts. Burson deserves to trade at a premium to its peers, Macquarie maintains, given its FY13-17 forecast compound earning growth rate of 27.1%.

Growth is expected to decelerate in FY18 and beyond but the company should still grow faster than Macquarie estimates for its small industrials coverage. The company's strategy is given the thumbs up from Morgan Stanley too, with the broker believing the stock deserves a premium rating.

There are a number of issues and challenges for the market but Macquarie finds none of these are pressing. The demise of Australian vehicle manufacturing is unlikely to affect the number of vehicles in Australia or the parts market.

There are strategies by manufacturers to tie the vehicle to its original service centre for a longer period via extended warranties and fixed price servicing but, as the automotive aftermarket is generally looking after vehicles more than four years old, this is not expected to impact demand.

The impact of electric or driver-less cars is considered an event well into the future, although it could create more of a issue for the aftermarket. Macquarie notes the fact that electric cars may require fewer parts is yet to be proven.

Burson generated FY15 pro forma revenue of $620m. The original business operates in the trade distribution part of the value chain through its 136-store network, located in all states except Western Australia. The company has a target for store numbers of 200. The two distribution centres are located in Brisbane and Melbourne.

The company generates 80% of sales through parts delivery to workshops with the balance from in-store sales to do-it-yourself customers. Aftermarket Network Australia expanded Burson's coverage with an additional 471 outlets. The wholesale business has 10 distribution centres servicing over 3,000 independent customers.

Macquarie does note that Burson, while successful in increasing gross margins over time, is not yet at the same margin as rival Repco. The broker believes this is due to a higher proportion of retail sales in the Repco business, estimating Repco is close to 50% retail while Burson is less than 20%.

Burson intends to expand gross margins by increasing the proportion of sales from private label and increasing the proportion of directly sourced parts. Macquarie notes the Aftermarket Network acquisition represents a material opportunity to increase both these components.

FNArena's database shows three Buy ratings and one Hold (UBS). The consensus target is $4.97, suggesting 4.7% upside to the last share price.
 

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