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New Cars, Falling House Prices Dim GUD Outlook

Australia | Jun 21 2022

This story features G.U.D. HOLDINGS LIMITED. For more info SHARE ANALYSIS: GUD

GUD Holdings' downgrade to FY22 earnings guidance has caused analysts to cut forecasts, also pulling back valuations and price targets.

-GUD Holdings forced to issue FY22 profit warning
-Brokers generally set lower target prices after cutting forecasts
-Deteriorating new vehicle sales weigh
-Less capital management potential, says Ord Minnett 

By Mark Woodruff

Last week GUD Holdings ((GUD)) downgraded its FY22 earnings guidance to $147m, having reiterated guidance in early April for between $155m-$160m.

Following April's reassurance, five brokers that are updated daily in the FNArena database for the company all had Buy (or equivalent) ratings and an average 12-month target price of $15.65. As a result of management’s warning, that average target price has fallen to $13.34, still 72.6% above the latest share price.

Of the five brokers, only Citi has decided to downgrade its rating to Neutral from Buy to reflect increased uncertainty surrounding the projected earnings recovery, which remains largely reliant on the normalising supply from original equipment manufacturers (OEM). It’s thought this may take longer than expected, plus it also is outside of the company’s control.

Citi downgraded its 12-month target price to $9.95 from $15.60, driven by lower earnings estimates for both FY22 and FY23, as well as the adoption of lower market multiples.

The company’s Automotive segment represents the vast majority of earnings and distributes spare parts under brands such as Ryco, Wesfil and Narva. Water products are sold primarily under the Davey brand.

In recent times, management has been on the acquisition trail and purchased AutoPacific Group to strengthen the company's exposure to the growing 4WD and trailer accessories segment.

However, Ord Minnett explains this acquisition (along with some other recent acquisitions) has increased the company’s exposure to OEMs and new vehicle sales, which has created more volatility in near-term earnings. This has resulted from the supply chain challenges faced by OEMs in producing and delivering new vehicles.

While Citi points out a deterioration in new vehicle sales since April has adversely impacted earnings from the AutoPacific Group acquisition, the broker still regards GUD Holdings as a higher quality business compared to what it was prior to the purchase.

Other reasons for the earnings downgrade

Wilsons, not one of the seven brokers updated daily in the FNArena database, understands the rising risk posed to GUD Holdings through reduced consumer discretionary spending levels. However, it’s thought this outcome is already excessively discounted in the company’s share price. Nonetheless, while the broker retains its Overweight rating, its target price is lowered to $9.70 from $14.90.

The magnitude of the earnings downgrade suggests to the analyst other factors at play apart from a decline in market volumes. It’s believed a recent loss of market share by Ford may also be weighing. Macquarie agrees the timing of supply of Ford Ranger and Toyota Landcruiser is particularly important to AutoPacific.

After an initial review following the earnings downgrade, Macquarie retains its Outperform rating and $16.95 target price, noting downside risks include ongoing delays to new vehicle supply for AutoPacific, and a material change in consumer demand for new vehicles.

Management noted much of the earnings downgrade relates to delayed vehicle deliveries due to supply chain challenges and Credit Suisse is adamant there are no internal problems which led to this outcome, other than timing issues.

Despite holding this view, the broker doesn’t rule out potential for a negative share market overreaction given AutoPacific was purchased from a private equity vendor and the perceived risk the earnings base was incorrectly evaluated. Should the overreaction occur, it’s felt there’s a compelling opportunity for investors to establish or increase their position in the company.

On the other hand, Ord Minnett believes the share price may justifiably come under pressure until sales have actually been achieved, as for other auto stocks.

Ord Minnett feels there may be less near-term capital management alternatives, given the increased levels of gearing incurred as a result of the AutoPacific purchase. It’s noted the company did not reiterate previous guidance out to December for the net debt to operating earnings multiple.

Citi agrees the balance sheet could take longer to de-gear as inventory will be higher for longer because of Chinese lockdowns.

The Outlook

UBS retains its Buy rating for GUD Holdings and notes solid demand continues across the legacy Auto businesses. Exposure across auto aftermarket and new vehicle channels is also thought to provide diversification.

Nonetheless, the broker sees risks for those segments of the business exposed to new vehicles, given the challenging consumer backdrop and the strong correlation between new car sales and property values.

Credit Suisse looks forward to a potential catalyst for a share price re-rate in early August, when the company holds its FY22 earnings call with an update on the OEM production status.

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