There are at least three different reasons why the Bapcor Ltd (ASX: BAP) share price could be a buy at the moment.
If you haven’t heard of Bapcor before, it’s a large automotive parts business. It has a number of different brands that offer different services. There’s Burson which delivers products to mechanics. It has Autobarn which is a large retailer of auto parts to the public. It has various specialised wholesale business, such as electrical parts. Bapcor has truck part businesses such as Truckline. It also has service businesses like Midas, ABS and Battery Town.
There are a few different reasons I really like the look of Bapcor:
Strong growth
When I’m looking for businesses to buy, I like the look of ones that are growing quickly. Over the years, a good growth rate can really compound into big numbers.
COVID-19 has been a very strange year and a half for Bapcor (and most businesses). After an initial crash, things really turned around.
There was a huge amount of government stimulus that caused a retail boom, which was great for the retail businesses like Autobarn.
A lack of new cars for sale also helped drive up the second hand car market. Those older cars still may need parts replacing, which helps most businesses of Bapcor.
Also, Aussies are stuck in Australia, so driving holidays are probably contributing to an increased demand for Bapcor products as well, with more wear and tear.
The half-year result we saw from Bapcor was that its total revenue had increased by 25.8%.
Operating leverage
Growth in profit margins can really accelerate shareholder returns.
Profit is what normally drives the Bapcor share price and pays for dividends. But in the first section I told you about revenue. When margins rise, profit can grow much quicker than revenue.
Due to economies of scale and improved efficiencies, Bapcor is seeing its profit rise much faster than revenue.
In the FY21 half-year result, Bapcor saw revenue go up 25.8%, but pro forma EBIT (EBIT explained) rose 45% and pro forma net profit after tax rose 54% to $70.2 million.
Pro forma numbers are simply the company’s way of trying to deliver the most accurate picture of what’s going on for shareholders.
As Bapcor gets bigger, newer revenue should become even more profitable, which will help pay for bigger dividends and more growth investment.
Big growth plans
Bapcor has already grown so much, but it recently released its 5-year strategy and target updates.
Asia is an important part of the overall strategy.
It recently bought 25% of a Singapore-listed business called Tye Soon which has operations across Asia which is making $200 million of annual revenue. Bapcor is hoping Tye Soon can make $400 million of revenue.
Bapcor also has a small collection (six) of Burson stores in Thailand, which it wants to increase to more than 60. This could increase that revenue there from $4 million to $100 million.
But it has other goals too. It wants to increase its digital offering and store count across all of its segments. Increasing the percentage of private brand sales is also an important goal.
With ‘Trade’ in Australia it wants to go from 200 to 260 locations. With Australian retail it wishes to grow the network from 133 to 200. In specialist wholesale it wants to grow turnover from $480 million to $600 million. In the service division it wants to grow from 105 to 500 locations.
Summary thoughts on the Bapcor share price
Bapcor may have some longer-term risks when it comes to the growth of electric vehicles, but they still make up a small percentage of vehicles in Australia. And Asia will hopefully be a good growth area in the coming years.
CommSec numbers suggest Bapcor shares are valued at 20x FY23’s estimated earnings.
It’s one of the ASX growth shares I’ve got my eyes on.
