Large Transformation Potential For Bapcor

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Brokers prefer to await signs of execution before including in forecasts the full benefits from Bapcor’s transformation program.

-Bapcor reiterates FY23 guidance though notes softer trading conditions
-Brokers refer to a big potential prize from the company’s transformation program
-Macquarie incorporates transformation benefits into forecasts, other brokers more cautious
-Citi feels targeted synergies are fairly low-risk
 

By Mark Woodruff

Bapcor’s ((BAP)) investor day either disappointed or excited brokers, depending on whether their focus was on the short term or a more positive longer term. Even then, the longer-term view requires some faith in management execution.

On the one hand, management made it clear that trading conditions have become more difficult, though reiterated FY23 guidance. On the other hand, further details on the Better than Before (BTB) transformational program revealed potential cost savings by FY25 of -$100m per year.

Citi points out the potential financial benefits equate to around half of Bapcor’s annual earnings (EBIT).

The company is a provider of automotive aftermarket parts, accessories, automotive equipment and services and operates out of over 950 locations spread across Australia, New Zealand and Asia.

There are five segments: Trade, Specialist Wholesale, Retail, New Zealand and Asia.

The BTB strategy as aiming for the transformation of a group of stand-alone businesses with distinct procedures and systems into a collaborative group with a more integrated supply chain and simplified operating model, explains UBS.

While the broker concedes the strategy does appear financially compelling, it is hesitant to factor in a significant portion of these gains just yet, given the inherently risky nature of transformations.

The majority of brokers in the FNArena database adopt a similarly cautious stance, as shown by the slight increase in average 12-month target price to $7.85 from $7.72.

Outperform-rated Macquarie was an outlier in the database prior to the investor day with the highest ($8.85) target, and proceeded to raise its target to $9.70 after attending.

While acknowledging a slightly softer trading update compared to that at the company’s AGM, the broker incorporates the transformation program benefits into its earnings forecasts.

UBS points to ongoing robust demand and revenue across Trade and Specialist Wholesale and notes the refurbishment pipeline at Autobarn is driving a solid sales uplift across its stores. The new Melbourne distribution centre also impressed.

On the negative side of the ledger, this broker lists both the one-off and ongoing near-term opex and capex requirements to target the FY25 uplift from the transformation program. Also, the trading update indicated a moderation of growth in the Retail and New Zealand segments, and lower year-on-year group margins due to price increases lagging cost inflation.

The analyst forecasts flat year-on-year-profit and expects downgrades to the consensus estimate for FY23 underlying earnings. While there’s considered to be upside to medium-term earnings from the BTB program, the market will likely await signs of execution.

In a further negative highlighted by Morgan Stanley, ongoing elevated inventory issues are weighing on previously anticipated cost-out targets from the new Melbourne distribution centre.

The BTB transformation program

Credit Suisse shows concern over the lack of specific detail for the BTB program and suggests the proportion of full benefit that investors believe will be achieved is key to an overall investment decision.

The broker decides to incorporate all the proposed costs but only 60% of the proposed investment benefits.

Management’s earnings upside of more than $100m from FY25 partially overlaps with existing strategies, suggests Citi, and consensus upgrades will likely be for a lesser amount.

To unlock the upside benefits, the company noted the requirement for one-off costs of $35-45m (which includes $15-20m in capex) and recurring annual opex of $10-15m.

Despite the large opportunity inherent in the transformation program, Citi points out the areas from which synergies will be extracted appear reasonably low risk.

The latest share price suggests 16.9% upside to the $7.85 average target price in the FNArena database, which has four Buy (or equivalent) broker ratings and three that are Hold (or equivalent).

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