Bapcor remains a great play on domestic tourism

Dominic Rose

Montgomery Lucent Investment Management

Bapcor (ASX:BAP) – Australia’s leading aftermarket auto parts distributor – has enjoyed very strong trading conditions since mobility restrictions have eased, and its share price has rallied accordingly. BAP has both growth and defensive qualities and remains a great way to play the domestic tourism thematic which could prove stronger for longer. And the balance sheet is now primed for acquisitions, further enhancing the growth potential of the company.

The company’s recent first quarter update (1Q21) highlighted 27 per cent sales growth despite drags from government restrictions in Victoria and Auckland. Growth is being propelled by multiple tailwinds including strong used car sales, reduced use of public transport, government stimulus and a redirection of consumption, particularly towards domestic tourism.

Although some of these forces are expected to eventually normalise, we see real potential for a ‘stronger for longer’ scenario playing out for the company. Even with the arrival of an effective COVID-19 vaccine, the shape of an international travel recovery will likely be gradual rather than a sharp snap back which is supportive of domestic holidays over the next few years (BAP benefits from more miles driven).

Additionally, working from home trends may persist for some time yet and the jury is still out on the extent these changes are structural in nature. Victoria coming out of lockdown will also be positive for BAP’s earnings trajectory in the near term.

Drilling down into the 1Q21 result, Burson Trade sales grew 10 per cent (7.7 per cent like-for-like and up 17 per cent excluding Victoria), New Zealand grew 6 per cent (4 per cent like-for-like), Retail grew 47 per cent (Autobarn company owned same store sales up 50 per cent) while Specialist Wholesale sales grew 45 per cent (18 per cent organic).

On the back of robust year to date trading, BAP expects strong 1H21 growth while 2H remains unclear – management refrained from providing FY21 earnings guidance which is understandable considering the uncertain broader backdrop.

That said, we note the resilience of the aftermarket auto parts sector while 2H21 will be lapping the COVID-19 lockdown period (2H20 NPAT declined 15 per cent) – this suggests FY21 should shape up as a very strong year for the company.

Notwithstanding the strong rally in the share price since pandemic lows, we view BAP as an attractive play on (‘stronger for longer’) domestic tourism whilst also offering investors with defensive-growth attributes. Earnings are relatively defensive (80 per cent derived from the trade sector where demand largely reflects miles driven and an old car fleet) and the growth strategy has multiple facets (industry consolidation, private label penetration, operational efficiencies, store roll-out and market expansion).

The balance sheet is also in very strong shape which positions the company well for potential corporate activity should opportunities arise.

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Dominic  Rose
Portfolio Manager
Montgomery Lucent Investment Management

Dominic is Portfolio Manager of the Montgomery Small Companies Fund – a small-cap Australian equity fund investing in 30 to 50 high quality, undervalued small and emerging companies with strong growth potential. The fund invests outside the ASX100.

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