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Date : 21/02/2022

G.U.D. Holdings Ltd

ASX :

GUD

Market Cap : $1.7 Billion

Dividend Per Share : $0.49

Dividend Yield : 4.08 %

Buy

52 Week Range : $9.608 - $13.274

Share Price : $11.99

GUD is ticking a lot of boxes as a solid investment. We recommend a "Buy".

Company Analysis

We recommended GUD twice last year, in early August 2021 at the price of $11.74 per share and in Mid-December 2021, while GUD traded at $11.63 apiece. Since then, the Company has performed efficiently, and this has transpired into the share price performance as well.

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Source: Tradingview

GUD Holdings (ASX: GUD) owns a portfolio of companies in the automotive aftermarket and water products sectors. The Group’s principal markets are Australia and New Zealand, where the Company holds market leadership positions in all categories its businesses operate. So far, the Group’s stable automotive aftermarket brands are unrivalled. GUD owns a reputable portfolio of brands, including Ryco Filters, Wesfil, Narva, Projecta, DBA, Injectronics, Goss, and Permaseal. In water products, the Company has the respected Davey brand.

Source: GUD

Company Updates

GUD: Rebounding Automotive margins, solid organic growth and acquisitions contribute to a record Group operating result

In a nutshell, GUD has achieved an exceptional first half of FY22. The Group reported a revenue increase of 32% on the previous corresponding period (pcp) underpinned by acquisitions and an organic growth of 5.7%.  The underlying EBIT, excluding JobKeeper, increased by 19% on pcp. Consequently, margins expanded by 1.8 percentage points (PPS) versus H2FY21. The underlying EBIT was driven by strong sales growth coupled with margin management actions through pricing, cost control and some FX gain which partially offset the higher supply chain costs, domestic inflation, and additional expenses in support of the longer‐term growth strategy.

Furthermore, the underlying NPAT, excluding JobKeeper, increased by 14.7% on the pcp, and underlying EPS decreased by 15.6%, reflecting the expanded capital base following the acquisition of APG and the associated equity raising in December 2021. Despite a substantial improvement in GUD’s EBIT, the Company reported an NPAT of $24.2 million, which is a 22.7% decline on the pcp reflecting non‐operating items of $14.5 million driven by acquisition-related costs of $3.9 million and an inventory reassessment within Davey as part of the Improvement Plan. This resulted in a $10.5 million write-down

Regarding GUD’s dividend, the Company interim dividend of 17 cents per share represents approximately 100% of reported NPAT and 68% of the underlying NPAT. The cash conversion of circa 63% was well below mid‐term targets, reflecting flagged, strategic inventory investment. Excluding APG acquisition‐related costs of $3.9 million, cash conversion was around 70%.

As the FY22 Guidance, GUD expects to deliver an underlying FY22 EBITA in the range of $155 million to $160 million, including Vision X and APG contributions.

Record year for GUD’s Automotive business arm

GUD’s Automotive revenue is up by 38.3%, driven by acquisitions. Earnings were also supported by organic growth of 4.6%, a pleasing outcome given the strong growth in the pcp. In our view, the revenue growth clearly reflects the resilience of the GUD Automotive business. Thus, the Group reported a record underlying EBIT of $61.1 million, up 23.1% on pcp excluding JobKeeper. We have also been pleased to see that GUD completed the acquisition of Vision X on the 30th of November last year. We believe this acquisition represents a strong complement to the Company’s portfolio and provides an entry into the US and European automotive lighting markets.

GUD entered into an agreement to acquire APG for $744.6 million

We think that this latest acquisition from GUD will propel the Company towards a fully integrated leader in 4WD Accessories and Trailering in Australia and New Zealand. Furthermore, we believe that this deal with APG will bring future export potential.

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Source: GUD

Water products business: Davey achieves strong revenue growth across several markets

GUD’s Davey brand continues to expand with sales up by 9.5% on the pcp, driven by several markets and segments. However, the Davey brand faces elevated freight and production costs, impacting export and domestic margins.

GUD exhibits solid financial positions despite challenges due to COVID-19

GUD is doing well with earnings growth across its business units. During the period, the Group has also successfully completed a $404.6 million equity raising via a fully underwritten institutional placement and entitlement offer to part-fund the acquisition of APG. However, GUD has to resort to a limited amount of debt to support its expansion. Hence, GUD increased its debt funding with existing lenders, although at attractive terms with well-diversified tenor. Regarding the Company’s net cash position, GUD has moved its $169 million cash and cash equivalent to a proforma net debt of circa $500 million “post” the APG acquisition, which was completed on the 4th of January 2022.

Focus remains on achieving Net Debt/underlying EBITDA (lease-adjusted) below 2 times by the 31st of December 2022. The Company’s balance sheet remains flexible to fund seasonal Net Working Capital, dividend payments, and potential bolt-on acquisitions.

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FY22 onward outlook

COVID‐related disruptions experienced during the first half of FY22 have intensified due to the Omicron variant. This has had a dampening effect on demand, more evident in general service and “wear parts”. While timing is uncertain, this is viewed predominantly as a deferral of demand that is expected to rebound once mobility normalises. In January, the supply of new vehicles impacted some of GUD’s business units. Hence, new vehicle sales are expected to decrease by around 5% on the pcp. On a positive note, strong segmentation resulted in Pick‐Up volumes increasing by around 4% on the pcp. Demand for Davey’s traditional Australian and NZ products remains solid, with European pool demand remaining strong.

The Omicron variant has further pressured operations and supply chains. These disruptions remain well managed, albeit higher absenteeism levels in some cases affect GUD’s ability to produce and distribute goods, which is reflected in higher backorder status, and GUD’s customers’ ability to receive and sell. Despite the intensified supply chain pressures, freight and supplier costs have, to date, been tracked in line with expectations but are not expected to moderate in the second half of FY22.

GUD has provided the following FY22 and CY22 EBITA guidance:

  • GUD remains on track to deliver the guidance reiterated in December 2021: FY22E underlying EBITA of $112 to $116 million, before the incremental contribution from Vision X and APG.
  • GUD continues to expect APG to deliver CY22 EBITA of $80 million to $84 million, in line with the guidance provided at the time of the acquisition.
  • Vision X is performing in line with expectations outlined at the time of the acquisition

Consequently, the Group expects its underlying FY22E EBITA in the range of $155 million ‐ $160 million.

GUD’s first half has demonstrated solid structural support for the Automotive aftermarket sector. We expect the Group’s strong market positions, combined with growth in the Car Parc, to support sustained organic growth in Automotive. Furthermore, the integration and planning for both Vision X and APG are well progressed. In addition, resources have also been added at the Group level to better serve the increased scale. We have seen that GUD’s capacity to pursue Automotive aftermarket acquisitions has not diminished in the near term. In fact, the pipeline of opportunities is still attractive. The recent spread of Omicron has seen capacity to produce and deliver against sales orders diminished in January, but we remain confident that this will be a deferral of demand rather than a loss in sales for GUD. If that scenario proves correct, the Company will stay on track to deliver its FY22 EBITA guidance of $155 to $160 million.

Investment Thesis

Revenue for the half-year increased 32% to $332 million, largely driven by acquisitions. Organic revenue increased 5.7% on the pcp, a pleasing result given the degree of mandated lockdowns in the first quarter (Q1), in addition to cycling strong post‐ COVID‐19 recovery sales in the pcp. Reported EBIT decreased by 12.7% to $44.5 million and included $3.9 million of Vision X and APG’s acquisition costs. Moreover, $10.5 million of non‐cash items related to the reshaping and reassessment of the Davey business profit improvement plan weighed also on the EBIT decline. The underlying EBIT of $59 million increased by 19% on the pcp, excluding JobKeeper payments of $2.8 million received in the pcp. The underlying NPAT of $35.2 million increased by 14.7%, excluding JobKeeper. Despite witnessing relatively stable earnings across GUD’s businesses, the cash conversion of 63.3% was well below mid‐term targets and reflected the Company’s strategic commitment to increase inventories. These higher levels were put in place to address supply chain disruptions, including lengthened shipping times and unreliability of shipping schedules, necessitating higher “in transit” and general safety stock. Payments to suppliers included $3.9 million of transaction costs relating to the APG acquisition and associated capital raising. Excluding these transaction costs, cash conversion was around 70%. In the second half, the cash conversion is expected to improve despite elevated inventory levels as the seasonal spike for Chinese New Year unwinds.

Regarding the Company’s dividend distribution, a fully franked interim dividend of 17 cents per share was announced, down from 25 cents in the pcp. The reduction reflects the expanded capital base of the Group following the December 2021 equity raising to fund the acquisition of APG.

APG’s acquisition was completed on the 4th of January 2022. The dividend represents approximately 100% of the reported NPAT and 68% of the underlying NPAT. It is important to note that APG did not contribute to the earnings in the first half of FY22.

GUD’s segmented revenue

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Source: GUD

Record underlying EBIT of $61 million for GUD’s Automotive business

GUD’s Automotive businesses reported very strong revenue growth of 38.3%, predominantly driven by the acquired businesses: G4CVA, ACS and Vision X. Organic growth of 4.6% was particularly pleasing given these existing businesses were cycling a strong COVID‐19 sales recovery of 13% in the pcp. The underlying EBIT of $61.1 million increased by more than 23%, excluding JobKeeper payments of $2.8 million received in the previous corresponding period. Furthermore, most of the existing Automotive businesses achieved impressive growth despite the record lockdown duration in the first quarter. However, wear and service demand were impacted by both service garage lockdowns and lower service activity. Consequently, the Ryco brand was flat along with Wesfil, which was slightly down during the first half of FY22. Wesfil’s performance reflects its large exposure to NSW, where lockdowns were impactful. Griffiths Equipment in New Zealand was also flat as demand was less robust than the previous corresponding period that benefited from a COVID‐19 sales recovery.

As in previous lockdowns, a rebound in demand is anticipated as the current Omicron impacts reduce and mobility normalises. GUD’s investment in inventory by its Automotive businesses helped sustain growth despite a challenging supply chain environment. The BWI brand continued to benefit from strong demand from caravan, truck and trailer and other Original Equipment customers. Disc Brakes Australia once again experienced strong growth in its domestic and export markets, demonstrating the underlying strength of the brand and products.

GUD’s Automotive Clutch Services (ACS) business performed slightly ahead of expectations. The G4CVA Group achieved 6% revenue growth in the second half of FY21; however, it has been more challenged by COVID‐19 disruptions. Staff shortages and materials supply have impacted output in these manufacturing‐based businesses. The large order backlogs give us confidence that sales have been deferred and not lost. G4CVA will fall under the APG leadership team in the second half bringing an additional depth of manufacturing expertise.

Overall, we are pleased to see that GUD’s Automotive businesses have performed well in the first half of FY22, particularly with the expansion in margins relative to the second half of FY21. We believe that this positive momentum will continue to build through the acquired businesses.

Davey: GUD’s Water business is marginally lagging behind, down $270K on the previous corresponding period

GUD’s Davey business reported a strong revenue growth of 9.5%, driven by commercial pumps in Australia and home pressure systems in Australia and the US. The pool business also observed robust growth in Europe, where sales were lifted by the new Lifeguard range and pool pump sales in the US. Although Davey sells through distributors in export markets, export sales continue to outstrip the previous corresponding period, albeit at lower margins. Davey’s traditionally strong Pacific and Indian Ocean export nations remained impacted by weak tourism due to the pandemic, and the Middle East export markets also remained soft due to the impact of COVID‐19 on those economies. Consequently, the underlying EBIT was $270 thousand lower than the previous corresponding period, a decrease of 12.6% due to significant COVID impacts on manufacturing.

Moreover, supply chain disruptions continued to impact factory efficiency, and the export markets could not absorb the elevated freight costs. Securing the requisite staff to meet the production demand has been challenging for GUD, and shift penalties also impacted margins.

GUD’s Water business is executing on a clear, profit improvement plan. As part of this plan, an inventory review was completed in H1FY22, resulting in a $10.5 million non‐cash write down:

  • GUD improved its end‐to‐end product cost transparency, which has led to a reassessment of overhead recovery reflected in inventory values, resulting in a one‐off impact of $3.3 million
  • The slow-moving and obsolete inventory levels were revised to reflect future product and sales planning, resulting in a one‐off impact of $3.9 million
  • Recoverability of inventory balances was also reassessed, resulting in carrying values being marked down to the lower of cost or net realisable value, resulting in a one‐off impact of $3.3 million

The Davey inventory and balance sheet are now aligned with the profit improvement plan. Furthermore, as part of the Company’s Improvement Plan, the Davey operating model is simplified, and processes are streamlined to improve customer service. The Company also refocused its Research and development activity to align with emerging trends, including energy efficiency, noise levels and smart connectivity. Sales and production operational planning is also being reshaped to optimise customer service and production efficiency. Better utilisation of interstate warehousing and higher levels of finished goods are also expected to reduce client lead times and improve service levels.

Overall, Davey’s domestic business has demonstrated resilience during the first half of FY22. However, the pandemic has continued to significantly impact margins, most notably due to the availability, manufacturing staff costs, and other cost inflation. We are confident that GUD’s Water business improvement plan will position Davey well for future success, albeit at a significant non-cash impact on inventory values. The change program will run through the rest of the 2022 financial year to position Davey for a recovery onward FY23.

GUD exhibits solid financial positions geared towards long-term growth onward FY23

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GUD’s net cash position of $169 million includes the $391.5 million equity raising, the dividend reinvestment plan that contributed $7 million, higher inventories, and the complete payment of $47.6 million for the Vision X acquisition. This net cash position moves to a proforma net debt of circa $500 million “post” the APG acquisition completed on the 4th of January 2022. Debt facilities increased by $431.4 million compared to the previous corresponding period to support acquisition activity. In terms of debt, GUD’s borrowing lines range from two to twelve years of maturity and provide a broad debt funding base. GUD’s focus remains on achieving a Net Debt/EBITDA below two times by the end of this calendar year. We expect EBITDA to remain stable above $103 million in the next three years. Accordingly, we are projecting GUD’s working capital to expand steadily at a CAGR of 31.58% from FY22 to FY24. With a relatively constant EBITDA margin above 19%, we believe GUD could remain flexible to fund seasonal Net Working Capital, dividend payments, and potential bolt-on acquisitions.

Our previous report can be accessed by clicking here.

Recommendation

GUD continues to be exemplary in its operating performance despite the challenging economic environment. Furthermore, the Company’s earnings growth trajectory remains intact. Accordingly, we believe GUD can remain flexible to fund seasonal Net Working Capital, dividend payments, and, most importantly, potential acquisitions. Therefore, we are reiterating a long-term “Buy” for GUD.

 

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