Bapcor and Infomedia worth considering

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As the cost-of-living crisis bites, it’s tempting to defer a few expenses. For some, that means delaying or skipping their annual dental check-up. For others, it’s pushing back their next holiday or making their car service stretch a little longer.

I thought about the effect of discretionary spending on car repairs for this column. When times are tough, one can imagine more drivers delaying their 10,000-kilometre service and pushing their vehicles a little harder.

At the same time, the work-from-home boom means more people using their vehicle less each week to commute. The upshot is their vehicle can go longer between services, meaning less demand for car repairs and parts.

Some repairs, of course, are unavoidable and thus not discretionary. Others, such as a routine service, might have a bit more wriggle room to delay, depending on car warranties and other servicing requirements.

Bapcor, a leading car-parts provider, reported lower growth in its retail operations due to weaker consumer confidence and retail spending. Its do-it-yourself parts operations, through Autobarn, Midas, and other brands, noted lower foot traffic at its stores and less spending on higher-margin discretionary items.

National Tyre and Wheel, a micro-cap stock, said it remains wary of the potential impact of higher inflation and interest rates on consumer demand for tyres. National Group shares are well down on their 52-week high.

Nobody doubts the short-term headwinds facing car repairers and parts providers, particularly those relying on discretionary retail spending. But recent weakness in share prices of auto repair/parts providers could be an opportunity for long-term investors.

Australia has some terrific parts suppliers. Bapcor has been a preferred small cap of this column for many years, principally due to its ability to supply parts to auto mechanics nationwide. Supply Network, an after-market parts provider for commercial vehicles, is another small-cap star.

Chart 1: Supply Network

Source: Google Finance

Medium-term trends bode well for car and truck parts suppliers. The first is population growth. More people means more vehicles on the road, and solid demand for car repairs and car parts. New and used car sales boomed last year, partly due to a catch-up from supply disruptions during COVID-19.

Ageing vehicles are another trend. The average age of Australian passenger vehicles has increased to 10.6 years, according to the latest Census. People are keeping their cars longer, partly because they are better built these days and also because of their rising replacement cost. Older vehicles mean more wear and tear and demand for parts.

In this cost-of-living crisis, one can imagine some people delaying buying a new car and keeping their current one for longer. Again, that should support medium-term demand for parts as people need to keep older vehicles running for longer.

The same is true of commercial vehicles. Australia’s ageing truck fleet has an average age of 14.6 years, according to the Truck Industry Council. That exceeds the average age in developed nations, meaning greater wear and tear, and parts.

As the parts industry reverts to solid growth trends in the medium term, current sluggish demand for some suppliers looks more like an aberration. Here are two parts suppliers to consider. As much as I like Supply Network, it’s hard to buy the stock after such a strong rally (although it keeps proving the doubters wrong).

  1. Bapcor (ASX; BAP)

 With around 1,000 locations in Australia, New Zealand, and Thailand, Bapcor is a leading provider of vehicle parts and accessories in the Asia Pacific. The business earned just over $2 billion in FY23.

About 90% of Bapcor’s revenue is from non-discretionary categories: trade mechanics in Australia and New Zealand, and specialist wholesalers in trucking and other markets. Bapcor serves over half a million mechanics and their workshops.

Although they are wholesale customers, auto mechanics are ultimately affected by discretionary spending trends, at least for some maintenance-related auto repairs and parts (i.e. people deferring their regular car service or taking longer to change tyres, for example). The other 10% of Bapcor’s revenue is from do-it-yourself discretionary retail.

Net profit after tax was $54.2 million in the first half of FY24, from $62 million for the same period a year earlier. As mentioned earlier, tougher trading conditions in Bapcor’s retail operations weighed on its interim result.

Management change has also affected market sentiment towards Bapcor. The business has had an unusually higher turnover of CEOs in the past few years, and has a new one, Paul Dumbrell, a former race-car driver, starting in May. CEO change has coincided with Board renewal and changes to Bapcor’s key finance personnel.

For a well-run business over such a long period, Bapcor has raised some doubts among analysts. From around $8.20 a share in late 2021, Bapcor has fallen to $6, having hit a 52-week low of $5.06 earlier this year.

An average price target of $6.38, based on the consensus of 10 analysts, suggests Bapcor is almost fully valued at the current price. The market looks too bearish: I prefer Morningstar’s valuation of $8 a share. It will take time for Bapcor to get there – and further price weakness this year is a risk as the market digests management changes and the full effects of a slowing economy.

For all the challenges, Bapcor is an excellent business in a market with solid medium-term growth prospects as more vehicles need more repairs and parts. It just needs to get through a tricky 12-18 months ahead.

Chart 1: Bapcor

Source: Google Finance

  1. Infomedia (ASX: IFM)

I recall first covering Infomedia back in the days when I edited the old Shares magazine. The parts-catalogue company floated on ASX in 2000.

Infomedia’s main attraction is its global footprint. More than 250,000 daily users in 186 countries use its retail automotive software to manage vehicle lifecycles.

Infomedia’s software-as-a-service platforms enable car dealerships to identify and order replacement parts. Dealers also use the technology to manage service appointments online, quote for repairs and arrange vehicle inspections.

In its 1HFY24 result, Infomedia reported 11% growth in revenue to $70 million due to growth in its Asia Pacific markets and improvements in its US operations.

The key for Infomedia is annual recurring revenue (ARR). It grew ARR by 8% in the first half of FY24 compared to the same period a year ago. As ARR rises, Infomedia’s annual recurring costs can remain reasonably flat, meaning higher margins over time.

Software-as-a-service (SaaS) can be a beautiful business when it achieves scale. Recurring revenue and high profit margins characterise the best SaaS firms.

Infomedia continues to deliver solid growth in revenue each year, but its annual recurring costs have trended slightly down since June 2022. A widening gap between Infomedia’s annual recurring revenue and costs leads to higher earnings.

Infomedia reported 36% growth in underlying earnings (EBITDA) for the first half of FY24, on 11% growth in revenue, thanks to higher margins.

Infomedia confirmed revenue guidance of $137-142 million for FY24 – a good sign for a micro-cap in this market. Its shares are up from a 52-week low of $1.33 to $1.60, but still well down on a peak of around $2.40 before the pandemic.

Capitalised at $599 million, Infomedia has an interesting global opportunity as Chinese car manufacturers increase their share of global car sales and as growth in electric vehicles quickens.

Infomedia says its recent work has enabled the business to pursue a ‘broader and bolder opportunity’ – a claim that seems reasonably well supported. I’ve always thought Infomedia had more potential than its market value reflected. It could be turning the corner, making it one to keep an eye on this year.

The stock suits experienced investors who understand the features, benefits, and risks of small-cap tech stocks.

Chart 2: Infomedia

 

 

Source: Google Finance

Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation, or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation, and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 13 March 2024.

Source: Google Finance

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