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Leading Independent Investment Research

Morningstar, Inc.

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Equity Bottom-Up

<div class="content-highlight"><p style="text-align: center;"><em>Demand for auto parts to remain strong, while Bapcor's moat protects it from online threats.</em></p></div><hr><p>While the market appears to be caught up with the fear of online competition and growing popularity of electric vehicles, we believe neither of these risks are likely to have a material impact on <a href="https://www.smartkarma.com/entities/8433" target="_blank" data-smartkarma-citation="entities:8433:1">Bapcor Ltd (BAP AU)</a>. Instead, we are drawn to the resilience of the aftermarket auto parts industry, which is driven by the steadily growing pool of vehicles, and the robustness of demand during economic downturns. Despite already dominating the fragmented auto parts trade sector, the company has an extensive network expansion runway. This underpins further market share gains and a strong earnings growth outlook, while strengthening its competitive position. The market underestimates Bapcor's potential and shares are attractively valued at the current price.</p><hr><h2>Key Takeaways</h2><ul><li>Shares in Bapcor are currently almost 20% undervalued relative to our AUD 7.00 per share fair value estimate. The stock currently trades at a forward P/E of around 18 times, broadly in line with the ASX 200 Index, which underestimates the strong 16% EPS CAGR we forecast over the next five years.</li><li>Demand for auto parts is highly resilient. While new vehicle sales are volatile and are tied to economic conditions, demand for automotive parts is steady throughout the economic cycle. Demand for parts is driven by the total supply of vehicles, which we forecast to grow steadily at around 2% per year.</li><li>Bapcor is the main consolidator in the trade space. The network expansion should drive market share north of 40% by fiscal 2022, up from 30%, at the expense of smaller players. We forecast group EBITDA margin to rise by around 150 basis points to just over 13% during the next five years, reflecting a combination of greater buying power, operating leverage, and higher-margin private label sales.</li><li><a href="https://www.smartkarma.com/entities/409" target="_blank" data-smartkarma-citation="entities:409:1">Amazon.com Inc (AMZN US)</a> is unlikely to be a major threat. Bapcor's customers are primarily tradespeople who typically prioritise rapid delivery time, product range, and expertise of service staff, over price. This bodes well for Bapcor, with its extensive store network distribution infrastructure, and brand. These characteristics underpin the firm's narrow moat and allows it to offer a difficult-to-replicate level of service.</li><li>While the potential for rising electric vehicle popularity introduces uncertainty around Bapcor's future, we aren't concerned. Australian adoption of electric vehicles has been slower than the rest of the world, and according to our estimates, penetration will be immaterial for at least another decade.</li></ul><hr><p><em>Analyst: Daniel Ragonese</em></p>

Demand for auto parts to remain strong, while Bapcor's moat protects it from online threats.While the market appears to be caught up with the fear of online competition and growing popularity of electric vehicles, we believe neither of these risks are likely to have a material impact on Bapcor Ltd (BAP AU). Instead, we are drawn to the resilience of the aftermarket auto parts industry, which is driven by the steadily growing pool of vehicles, and the robustness of demand during economic downturns. Despite already dominating the fragmented auto parts trade sector, the company has an extensive network expansion runway. This underpins further market share gains and a strong earnings growth outlook, while strengthening its competitive position. The market underestimates Bapcor's potential and shares are attractively valued at the current price.Key TakeawaysShares in Bapcor are currently almost 20% undervalued relative to our AUD 7.00 per share fair value estimate. The stock currently trades at a forward P/E of around 18 times, broadly in line with the ASX 200 Index, which underestimates the strong 16% EPS CAGR we forecast over the next five years.Demand for auto parts is highly resilient. While new vehicle sales are volatile and are tied to economic conditions, demand for automotive parts is steady throughout the economic cycle. Demand for parts is driven by the total supply of vehicles, which we forecast to grow steadily at around 2% per year.Bapcor is the main consolidator in the trade space. The network expansion should drive market share north of 40% by fiscal 2022, up from 30%, at the expense of smaller players. We forecast group EBITDA margin to rise by around 150 basis points to just over 13% during the next five years, reflecting a combination of greater buying power, operating leverage, and higher-margin private label sales.Amazon.com Inc (AMZN US) is unlikely to be a major threat. Bapcor's customers are primarily tradespeople who typically prioritise rapid delivery time, product range, and expertise of service staff, over price. This bodes well for Bapcor, with its extensive store network distribution infrastructure, and brand. These characteristics underpin the firm's narrow moat and allows it to offer a difficult-to-replicate level of service.While the potential for rising electric vehicle popularity introduces uncertainty around Bapcor's future, we aren't concerned. Australian adoption of electric vehicles has been slower than the rest of the world, and according to our estimates, penetration will be immaterial for at least another decade.Analyst: Daniel Ragonese

Bapcor's Network Expansion Running at Full Throttle