Bapcor: Discretionary Weakness Weighs on Autobarn’s Near Term, but Long-Term Dynamics Intact

We think pessimism around Bapcor BAP is too focussed on the weak near-term outlook, overlooking the strong underlying dynamics in automotive spare parts. We lower our near-term earnings forecasts, but the cut is immaterial to our unchanged AUD 8.00 fair value estimate as we make no material changes to our long-term forecasts. We expect Bapcor to continue to capture share from the long tail of smaller competitors by distributing a wider range of spare parts quicker, more reliably, and at a lower cost—competitive advantages that furnish the firm with a narrow economic moat.

The first quarter of fiscal 2024 is proving relatively challenging for Bapcor. This is principally due to the retail business—about 20% of earnings—as the split between discretionary and nondiscretionary sales growth worsens into fiscal 2024. The subdued retail environment amid rising cost of living pressures is proving a drag on discretionary expenditure, and the company noted a further deterioration in retail spend during the first quarter. This has dragged year-to-date revenue to low-single-digit growth. We lower our fiscal 2024 NPAT forecast by 6% to AUD 129 million—a 3% improvement on fiscal 2023. Although we forecast 4% revenue growth, we expect profit margin degradation. The firm flagged ramping input costs weighing on the September quarter.

We estimate about half of retailing sales, operating under stores like Autobarn, is discretionary. But we think the remaining half of the retail business, and the bulk of the trade and specialist wholesale businesses—together driving some 90% Bapcor’s earnings, is tied to largely nondiscretionary vehicle maintenance and spare parts. Indeed, Bapcor noted the trade and wholesale businesses are continuing to grow, albeit at more moderate rates than in fiscal 2023. Maintenance can be delayed but not ignored. We also expect an element of countercyclicality as consumers choose to maintain their existing car for longer rather than buy a new vehicle.