Small Caps | Feb 17 2023
This story features G.U.D. HOLDINGS LIMITED. For more info SHARE ANALYSIS: GUD
Market responds positively to a just in-line first half performance from GUD Holdings, driving a share price increase and improved confidence in the company's outlook.
-GUD Holdings’ first half result didn't seem exceptionally good, but it did significantly boost investor confidence
-The core Automotive business was the stand-out, supported by price increases and acquisitions
-AFG lags, but should be supported by structural growth in demand for 4×4 and SUV vehicles
By Danielle Austin
Despite an 8% share price rally for GUD Holdings ((GUD)) following the release of its first half results, followed by a further gain of 7.49% the following day, analysts continue to see further upside potential for the shares on a combination of a beaten down share price and increased confidence in the company’s outlook.
GUD's confidence-boosting half-yearly performance was carried by the company’s core automotive business, delivering another robust performance increasing earnings 52% year-on-year to $93m, although the division’s earnings margins declined -230 basis points.
This performance was supported by both price increases and recent acquisitions, particularly the more recent AutoPacific Group (APG) acquisition. At a group level, earnings increased 53% year-on-year to $90m.
GUD designs and sources aftermarket automotive components, distributed through a number of its brands including APG, Ryco, Wesfil and Narva, plus water products, largely distributed through its Davey brand.
The company’s automotive segment remains its majority earner, with the spare parts segment less impacted by changes in consumer spending or behaviour.
Having acquired APG group in late 2021, the subsidiary was able to contribute a full six months to GUD's second half result, but was heavily impacted by supply constraints, and margins were flat half-on-half.
According to Ord Minnett (Accumulate, target price $12.00), the acquisition left GUD more exposed to the increasingly volatile new car market, with a majority of APG’s sales generated from original equipment manufacturers.
The company is yet to provide full year guidance, but commentary has improved confidence in a stronger second half performance for a number of brokers despite the company referencing macro uncertainty around the consumer environment and foreign exchange in the current half.
Price increases are expected to further impact on the second half, while order backlogs remain at record highs.
Ord Minnett expects supply issues to moderate over 2023, but also anticipates a decline in new vehicle demand as cost of living pressures increase. As such, the broker expects new vehicle sales volumes to remain subdued through 2023, before picking up in 2024.
Improvement from APG not enough for some brokers
Despite meeting consensus expectations, performance from APG holdings drove a group earnings miss to Macquarie’s forecasts of -6%. This broker (Outperform, target price $11.60) found APG’s $25m earnings contribution to be disappointing.
Macquarie but does note a strong sales performance through early 2023 and expects quarterly sequential improvement to carry through into the next half. APG continues to guide to a 55% second half skew, implying earnings of $31m, below Macquarie’s estimated $35m.
Operating cash flow missed UBS' (Neutral, target price $8.80) expectations despite increased supply chain finance. This broker feels improvement in foreign exchange rates and marginal quarterly improvements from APG make a material improvement to earnings risk.
Citi (Buy, target price $10.00) and Credit Suisse (Outperform, target price $13.90) found the result operationally in line, with both highlighting concerns around the lower cash conversion rate of 76%.
Outside FNArena's daily coverage, Wilsons (Overweight, target price $11.29) also found the first half result a slight miss to its assumptions. This broker expects the growth outlook for AFG will continue to be supported by structural growth in demand for 4×4 and SUV vehicles.
Wilsons suggests export opportunities are adding an additional potential growth avenue. This broker anticipates such positive outlook can drive a further re-rating of the stock.
In what might as well be considered an indication of just how much undervalued the shares were prior to this week's H1 results release, FNArena's freshly updated consensus price target, derived from five major stockbrokerages covering the stock, remains in excess of 17% above yesterday's closing share price ($11.26 versus $9.61).
Targets vary from $8.80 (UBS) to $13.90 (Credit Suisse). The five brokers included in FNArena's consensus are Macquarie, Citi, UBS, Credit Suisse and Ord Minnett; all monitored through the daily Australian Broker Call Report.
On freshly updated forecasts, GUD's EPS is projected to more than triple to 77.6c in the current financial year, followed by a gain of 11.3% in FY24. Implied dividend yields are 4.3% (FY23) and 4.9% (FY24).
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