The Bapcor Ltd (ASX: BAP) share price is a good opportunity in my opinion.
Bapcor is Australia and New Zealand's largest auto parts business with a number of different businesses including Burson, Autobarn, Midas and ABS.
It had a very strong FY17. Its continuing operations generated revenue growth of 48%, pro-forma earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 52.4%, pro-forma net profit after tax (NPAT) growth of 50.9% and pro-forma earnings per share (EPS) growth of 36.4%.
Bapcor had guided the market of NPAT between $65 million to $71 million for FY17. It achieved pro-forma net profit after tax of $71.5 million, beating the guidance.
For FY18 the business has guided NPAT growth of 30%, which is impressive considering Bapcor is only trading at 24x FY17's earnings.
However, I think there's more to Bapcor than just good growth in FY18 and a good PEG ratio.
Management have done an excellent job of integrating the businesses it has acquired in recent years. That translates to implementing good processes and leads to growing profit margins. Indeed, the EBITDA margin increased from 11.2% to 11.6% in FY17. I believe margins will grow further in the coming years, significantly helping the bottom line.
For instance, management believe that the New Zealand Hellaby's acquisition will lead to a net benefit of between $7 million to $10 million from the optimisation program.
Margins aren't the only thing growing that will help profits. The business has targets to increase its store numbers and revenue in all segments, which should be a big boost to revenue over the next five years. It also plans to grow into Asia in the future.
Revenue is also growing at a good rate thanks to organic growth. In FY17 its Burson brand, the main source of revenue and profit, achieved same store sales growth of 4.6%. Positive growth was achieved in every state and region.
The balance sheet is in good condition and should be in a much stronger position at the end of FY18 as it aims to have raised at least NZ$92 million from non-core sales from Hellaby's non-core businesses. Bapcor had a conservative payout ratio of 56.7% of statutory NPAT in FY17. The current grossed-up dividend yield is 3.23%.
Management are not afraid of Amazon because 80% of Bapcor's business is trade and wholesale, which involves service levels and specialised product knowledge. Retail may have exposure, but it's expected to be small. Only 5% of auto accessory sales are online overseas. Bapcor has online capabilities today and can join the Amazon marketplace.
Management are also not concerned by electric vehicles. The industry has adapted to whatever changes occur. It already has electrical and electronic component businesses. So far, electric vehicles are not making an impact as only 2% of cars are electric or hybrid.
Foolish takeaway
Bapcor is trading at good value in my opinion at only 24x FY17's earnings. If it achieves 30% NPAT growth, or more, in FY18 I think the share price will do very well.
