Bapcor: Auto Spare Parts Remain Resilient

We maintain our AUD 8.00 fair value estimate for shares in narrow-moat Bapcor BAP following a market update. Bapcor provided limited qualitative guidance, principally pointing to an expectation for half-on-half improvement in trading. We maintain our fiscal 2023 EBITDA forecast of AUD 308 million, implying an 11% half-on-half improvement from AUD 146 million banked in the first half, underpinned by strength in the core trade and wholesale businesses. At current prices, shares in Bapcor screen undervalued.

There was little else of note in the update. Bapcor merely confirmed what we already presumed. Rising cost of living pressures are weighing on retail revenue and margins, while the trade and wholesale divisions remain resilient. We had already anticipated a more subdued retail environment, which is more exposed to discretionary purchases. Demand for discretionary automotive accessories can be highly volatile amid challenging economic environments. Aggressive rate hikes from the Reserve Bank of Australia and rising cost of living pressures are biting, and we expect demand to ease as consumers prioritise consumer necessities like food and housing expenses over discretionary accessories.

Nevertheless, the vast majority Bapcor’s earnings are nondiscretionary. Bapcor’s Burson trade and specialist wholesale businesses in Australia and New Zealand comprise about 80% of group earnings, principally selling maintenance-related automotive parts. About half of the remaining retail business is nondiscretionary spending for DIY maintenance. Automotive spare parts, required for routine maintenance and repair of vehicles, are less affected by changes in discretionary income and consumer confidence, and demand growth is broadly driven by the increasing pool of vehicles. There are currently about 20 million passenger vehicles in Australia, and we expect vehicle registrations to grow at low-single digits over the next decade, roughly in line with population growth.