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Date : 13/12/2021

G.U.D. Holdings Ltd

ASX :

GUD

Market Cap : $1.43 Billion

Dividend Per Share : $0.32

Dividend Yield : 4.87 %

Buy

52 Week Range : $9.608 - $13.274

Share Price : $11.63

GUD has been very active with a few acquisitions recently and the automotive business has been a stand-out. We have been positively surprised by GUD’s approach to tackling COVID-19 through a “defence and offence” strategy which appeared to serve the company well. The recent acquisition of Vision X and AutoPacific will accelerate further the expansion of the company to secure its leading position in Australia and abroad. Therefore, we are reiterating a long-term “buy” for GUD.

Company Analysis

We recommended G.U.D. Holdings (ASX: GUD) last time on the 2nd of August at $11.74 per share. Since then, the company has performed efficiently and has been acknowledged by the investors’ community as a reliable and stable company. Hence, this reflected on the GUD share price which remained stable above its long-term support level of $11. This, despite the uncertainty induced by the discovery of a new COVID variant, GUD’s price action remains positive. At the time of writing, GUD shares are changing hands above $11.70 ready to retest CY20 high at $13.25.

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Source: Tradingview

Since our last coverage of the stock, many positive things happened to the company. GUD made a couple of key acquisitions which we will detail hereafter.

Latest development: GUD expands into new geographies with the acquisition of Vision X

GUD Holdings recently announced that it has entered into an agreement to acquire the Vision X Group of lighting businesses from the company’s US and Korean founders. The Vision X leadership team is to remain in place and the acquired business is to become part of the BWI group. Vision X is highly complementary to BWI with established product development and manufacturing facilities in Korea and China, as well as marketing, sales, product development, warehouse, and limited manufacturing facilities, in the USA. The group currently sells to customers on all continents with an emphasis on products used in Industrial, Commercial, Automotive, Marine and Fire and Emergency applications to both original equipment and aftermarket customers. Vision X delivered EBITA of US$8.8 million in the calendar year 2020 and is currently on track to achieve a double-digit EBITA growth in the calendar year 2021. Vision X EBITA margins are broadly in line with the average of GUD’s legacy automotive businesses. The transaction is expected to be completed with a payment of US$52.8 million, subject to customary cash and working capital adjustments. With this upfront payment and subsequent earn-out payments up to a maximum of US$18.6 million based on the achievement of EBITA milestones, the total potential consideration is circa $99.6 million.

Source: GUD: Vision X revenue growth and EBITA growth

In our view, the acquisition will make an immediate positive contribution to the GUD’s EBITA and is forecast to be a high single-digit EPS accretive, pre synergies in FY22. The acquisition is to be debt-funded by GUD’s existing lenders in the USA and Korea combined with a one-year promissory note issued to the vendors.

Vision X is an important pillar in one of GUD’s longer-term portfolio aspirations of becoming a global niche leader in automotive lighting. This acquisition is strongly aligned with GUD’s domination strategy in this niche market.

  1. Enhance diversification by product, customer, and geography: Vision X’s products are powertrain-agnostic and EV ready, thereby reducing GUD’s reliance on internal combustion engine (ICE) revenues. Furthermore, circa 80% of Vision X’s customers are new to GUD and are spread across all continents. The acquisition provides the company with a beachhead in the USA and a distribution foothold in Europe, which are the two largest lighting markets.
  2. Addition of offshore lighting manufacturing capability: the Korean and Chinese facilities bring state-of-the-art equipment and product development capabilities. This manufacturing capability adds diversity and supplier surety and further complements existing supply partners.
  3. Compelling financial impact and longer-term potential synergies: attractive impact on short term financials but also longer-term opportunities exist to expand Vision X’s Australian revenue by leveraging the marketing and distribution capabilities. In addition, Vision X provides the company with a platform to sell BWI’s GUD lighting products to Vision X’s customer base in the US and Europe. Moreover, longer-term upside exists from supplying GUD’s BWI lighting products with the potential to also improve margins.

Vision X is a market leader in the design, engineering, and manufacturing of LED automotive lighting. With over 1,200 products and more than five hundred trademarks, design, and utility patents GUD is buying a well-established, well-run business that performs strongly in the automotive, motorcycle, mining, marine, general industrial, and fire and emergency vehicles. This acquisition is a highly complementary business that is consistent with part of GUD’s strategy to diversify into new markets, and further strengthens GUD’s portfolio ambition of building a global niche in automotive lighting. Vision X is trading strongly and will bring to GUD a set of loyal customers on all continents. It will form an independent operating company within the group.

Source: GUD

Vision X in a nutshell: We believe the acquisition of Vision X to be strongly beneficial for the group. Hence, Vision X brings to GUD a strong product range and development across various segments:

  • Automotive: vehicle lighting for on and off-road applications, including jeeps, trucks, and motorcycles.
  • Fire and Emergency: LED scene lighting and brow lighting for fire and emergency vehicles.
  • Mining: LED lighting for mining equipment and vehicles in surface and underground work environments.
  • Commercial: LED lighting solutions for commercial indoor and outdoor applications.
  • Marine: LED lighting for commercial vessels, recreational boards, and seaports.

But not only that. Thus, Vision X also has a solid team of design and development capability with in-house engineering, in-house prototyping, and in-house testing. Overall, we like the idea behind this acquisition as it broadens GUD’s diversified portfolio. Hence, Vision X has a diversified revenue by segment and region with a strong presence in North and South America.

Source: GUD

Latest development: GUD has entered a share purchase agreement to acquire AutoPacific Group for circa $744 million from Pacific Equity Partners

Late November, GUD announced that it has entered into an agreement to acquire AutoPacific Group for a total consideration of $744.6 million. GUD’s acquisition of AutoPacific will see the Group meaningful step towards its vision of becoming the integrated leader in 4WD Accessories and Trailering in Australia and New Zealand. With this acquisition, GUD will also have the potential to expand with future export. The transaction is currently in progress between the two parties, and it is expected to complete in January next year.

We see this acquisition to be a significant positive contribution to GUD’s earnings. Hence, the 4WD accessories and trailering is a cornerstone of GUD’s automotive vision to dominate this niche market and create a solid automotive related-product portfolio.

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Source: GUD

We are excited to see this opportunity for GUD to expand its existing 4WD and commercial vehicle businesses with complementary products, customers, and capabilities. AutoPacific is an industry-leading designer, manufacturer, and distributor of high-quality products. AutoPacific engineers and develops automotive and lifestyle accessories that are suitable for all combustion and electric vehicle applications.

AutoPacific is a clear leader in the 4WD accessories and trailering market in Australia and New Zealand. We are convinced that this acquisition is highly attractive and a great strategic fit for GUD, here are the seven reasons that support our view:

  1. AutoPacific is the undisputed market leader in towing with strong brands and a rock-solid market position across a diverse range of trailering, cargo, and functional accessories.
  2. AutoPacific offers a large and growing addressable market.
  3. AutoPacific is bringing to GUD “blue chip” customers with diverse and strong long-term relationships. The top five customers have an average tenure of twenty-one years.
  4. AutoPacific has one of the best Research and Development capabilities with a demonstrated track record of innovation and category penetration.
  5. AutoPacific is also bringing an established large-scale infrastructure. It is well invested in manufacturing and distribution capabilities across Australia, New Zealand, and Thailand.
  6. AutoPacific exhibits strong financial performance geared towards future growth potential. Thus, the company’s position is driven by increasing market share, new product development and category expansion underpinned by solid market growth.
  7. And last but not least, AutoPacific has a strong, proven and longstanding management team that has scaled organically and integrated value accretive acquisitions.

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Source: GUD

The acquisition and the transaction costs have been funded by a fully underwritten $405 million equity raising by way of an institutional placement and a pro-rata accelerated non-renounceable entitlement offer. Furthermore, GUD will also use its $282 million of acquisition debt, equating to an estimated net debt divided by 2.5 times of December 2021 EBITDA. And finally, $75 million will be provided through new GUD issued shares.

The $405 million equity raised consists of a fully underwritten institutional placement to raise approximately $120 million, and a fully underwritten 1-for-3.46 pro-rata accelerated non-renounceable entitlement offer to raise circa $285 million. For that, 39 million new fully paid ordinary shares in GUD will be issued under the equity raising which is equivalent to 41% of existing GUD shares on issue. All the new shares under the equity raising will be issued at $10.40 per share.

GUD exhibits robust demand across its automotive businesses with acquisitions to drive substantial profit growth

We can say that the market sentiment reflects quite accurately the business performance throughout the second half of the calendar year. GUD stock price has been traded sideways since the beginning of this year between $9.61 and $13.69 per share. Around May we have even witnessed steady volume attesting of the good reception from the investors following the release of GUD’s trading update on the 5th of May 2021. According to the release, GUD did quite well during the third quarter with the company’s performance in line with its guidance.

The automotive aftermarket has been supported by strong workshop end-user demand, which has underpinned year-to-date organic sales growth of 15%. Furthermore, the macroeconomic drivers remain positive for the sector with used vehicle volumes and values on the rise. We also see an anticipated rebound post-COVID, with mobility at strong levels such as domestic tourism with private vehicles due to aversion to public transport. On the flip side, some challenges are to be expected such as a decrease in new vehicle supply or even interruptions due to microchip shortage. Furthermore, the recent discovery of a new COVID variant also affected GUD’s share price which dipped below $10 before stabilising above its long-term support at $11.

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Source: GUD

We are convinced that GUD will have the ability to grow further in line with the automotive sector which is on the pathway to recovery. Thus, during the first quarter of this year, new light-vehicle sales grew by +13% year-on-year, a remarkable improvement compared to the last quarter of 2020 which saw new light-vehicle sales increase by +8.4% year-on-year. GUD is also in the quest of adding more businesses to its automotive brands’ portfolio. The firm has even stated that there is no shortage of automotive aftermarket acquisition opportunities. As the saying goes “buy the dip”, GUD is currently doing exactly that with the recent completion of its acquisition of the ACAD division of AMA Group with G4CVA.

For GUD’s water business, well, we are not that positive. Thus, year-to-date, GUD’s water business organic sales are only up by 4% over the previous corresponding period and that was mainly due to the pandemic and lockdowns which continue to impact the company’s operations. GUD is attempting to resolve that by ramping up its production to meet its sales backlog which could involve incremental costs such as shift penalties, outwards and export air freight, partial factory closure. All these are nibbling away at the company’s margins. On a positive note, GUD has stated that the company has a strong inventory position to support demand.

As we have mentioned, GUD stock is currently traded in a tight range year-to-date, and we think that it is due to the company’s cost inflation which is a tad above levels flagged with its first-half results that hold the company’s share price back. This is being driven by freight costs and supplier price rise requests, which are under negotiation. Despite this, GUD has positively narrowed its FY21 underlying earnings guidance to an EBIT of $98 million to $100 million, slightly more optimistic than the previous guidance of $95 – $100 million. As the saying goes “cash is king” and that is what we like from the company’s cash conversion target of circa 80% to 85%.

For FY22, GUD reiterates previously provided FY22 guidance and remains confident to deliver underlying EBITA within the range of $112 million to $116 million. This excludes potential earnings contribution from the latest acquisition of Vision X and AutoPacific. We can also expect that the second half of FY22 to be slightly higher than the first half of the 2022 financial year. Pleasingly, we are projecting Vision X performance to be stunning for FY22 and achieve a double-digit EBITA growth by the end of the calendar year 2021.

Company Updates

FY22 onward outlook: Continuous expansion in the automotive business through strategic acquisitions

GUD’s portfolio is centred on the automotive industry and is developing its water business alongside. We want to emphasise that the automotive business represents a larger chunk for GUD bringing 78% of the total revenue of the company. Throughout FY20, the group has been on the lookout for numerous acquisition opportunities across various automotive product categories. Hence, during FY21 and early FY22, GUD acquired Vision X and is in the process of purchasing AutoPacific, two solid businesses that will significantly contribute to the group’s earnings onward FY22.

This has been demonstrated recently, and we think that GUD is applying rigorous discipline in its acquisition process out of a thorough analysis of the strategic fit and valuation. Over the last two years, this has been proved to be successful for the company as attested by the resilience of the business particularly during the unexpected impacts of the pandemic. Recently, the company has stated its intention to continue its growth initiative in its automotive business segment, however, the firm also indicated its intention to double its effort and make sure of high integration and manage the risk of impairment. GUD remains clear that acquisition opportunities for the automotive portfolio are still available and attractive, however, appropriate caution will be exercised with the prevailing uncertainty.

Numbers speak for themselves, so far, since FY18, GUD’s plan has shown great results with a strong business foundation that led to solid gross profit growth at a CAGR of 7.92% and a steady increase in liquidity with working capital growth at a CAGR of 12.48%. Accordingly, we expect EBITDA margin to remain steady above 19.57% onward FY22 assuming a stable annual revenue above $529 million.

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Taking the opportunity to summarise each business, it is clear GUD has been impacted by the COVID‐19 pandemic, although not uniformly across the portfolio, or even within the automotive business segment. Each of GUD’s automotive businesses continues to enjoy a strong and unique market position, with market‐leading brands and a healthy track record of both product, service innovation and pricing power. Throughout FY20 and the first half of FY21, GUD’s brands continue to be demanded by end-users. Hence, the company’s two filtration offerings, with Ryco and Wesfil combined, had 81% of the first-choice recommendation of workshops in a recent survey. Wesfil’s strong sales growth was supported by its well‐recognised value‐orientated brand proposition. This was further supported by the business’s comprehensive state‐based customer service and distribution strategies and the ongoing momentum of newly launched incremental product categories. Regarding GUD’s Ryco brand, it maintained its pre-COVID sales level despite the unfavourable market condition. However, the demand in the second half was quite variable from month to month with the impacts of large destocking from resellers and COVID lockdown that happened in New Zealand. Ryco maintained the ongoing tempo of filter product releases and saw increasing growth from its catch can products which was the recipient of the AFR Innovation award. During the period, the overall filter market was no less competitive, and collectively, Wesfil and Ryco remain proactive in defending their strong market position. On the other hand, the BWI brand experienced a contraction in the top‐line, as the most impacted of the automotive businesses with the shutdown of its offshore markets and slippage in the more discretionary and OEM product channels in Australia. On a positive note, the BWI brand was able to add new customers and helped some existing customers with its own house‐branding programmes. BWI was recognised for the new products with several awards and satisfyingly, BWI recorded more than 10% of its revenue in products less than 12 months old.

GUD to continue leveraging on its reputable automotive brands: Ryco, Wesfil, BWI, DBA and AAG

Along with GUD’s big brands which are Ryco, Wesfil and BWI, DBA, IMG and AAG all delivered strong revenue growth. IMG experienced an uptick in the repair and remanufacturing demand, with record jobs per day and gained traction in distributing engine management parts to the independent reseller channels, increasing product cataloguing substantially. Furthermore, during the year, the IMG business launched a new website to enable better velocity in the repair process. Regarding DBA brand’s, DBA did relatively well thanks to strong domestic sales and solid growth in the United States, which offset the COVID‐19 impact in Russia and other European countries. DBA expanded its product range with the launch of a DBA branded disc pad programme in pursuit of a larger share of the “wheel end” market.

A significant achievement is DBA gaining the R90 certification which is an important Economic Commission for Europe automotive design standard to enable further Western European market distribution. And finally, AAG delivered strong growth as well, and in fact, saw a stronger demand through the back end of the year as end customers started to consider engine rebuilds with greater intensity. The AAG integration and relocation proof of concept project continued in parallel, although delayed by 3 months again due to practical impacts of COVID‐19.

GUD’s Davey water business to remain weak for some time

GUD also spent considerable effort to build a solid foundation for its water business, Davey, to deliver mid-term growth and maintain profitability afloat. While revenue grew modestly, the EBIT was impacted through new product development costs, restructuring and the significant impact of government social distancing measures. Positively, Davey’s farm trials of Modular Water Treatment products continue to progress, with sales that have been secured in new applications such as hospital, hospitality, and other agricultural applications. Moreover, Davey sold out its entire allocation in Europe of its new Nipper chlorinator and delivered the launch of the Tank Sense product. We have seen tremendous effort from the company to shift the momentum by diligently executing its strategic plan to optimize its supply chain, accelerate its commercialisation of product innovation and diversify its channels to market. This falls right in time with the drought eased and fires abated, which in our opinion will certainly trigger the start of an infrastructure rebuild, where notably, water pumping is high on the list of remedial repair or replacement.

Strong inventory and good momentum to support GUD’s earnings growth alongside the economic recovery

During FY21, we have witnessed encouraging operating performances which continued through the second half of this year. Presuming there is no upcoming fiscal cliff or any significant impact from mobility restrictions, conservatively, we expect GUD’s EBIT to stay in line with the second half of FY21. We have also seen the company making sure that it has sufficient inventory levels which is a key to securing near-term sales opportunities. Furthermore, according to our analysis, we expect the inventory turnover to remain above the key threshold of 1.0 over the next two years. Consequently, we anticipate cash conversion in the 80% to 85% range for the full year and an increase in cash from operating activities at a CAGR of 9.98% from FY22 to FY24.

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Industry Analysis

New and used car prices are expected to stay high until mid-2022

New and used car prices are expected to stay high until the second half of 2022, with new vehicle supply from overseas manufacturers likely to stay constrained for several more months. Second-hand car prices have jumped 34% on average in Australia since late 2020 and are up 10% since the start of this calendar year. Despite the supply of new cars built up again after the recent semiconductor shortage, high used car prices would persist well into 2022 even though the rate of growth is now slowing. Relative strength compared to the pre-pandemic level is likely to continue, although we expect car prices to come down gradually over the next few years. This will be beneficial for the automotive sector with the boom in used car prices combined with rising new car prices fuelling the bottom-line growth.

The recent Inflation figures released by the Australian Bureau of Statistics showed the price of motor vehicles increased by 2.2% in the June quarter on the back of strong consumer demand and the global shortage of semiconductors which has crimped production at many of the world’s largest car manufacturers. The increase over the last 12 months was 7.4%. However, it is important to note that used cars are not included in the Australian consumer price index measure.

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Source: ABS, RBA: Australia, consumer price inflation

Australian buyers face long waits for many models. The semiconductor chip issues were continuing to constrain the global supply chain. Another factor to consider was that carmakers are focusing heavily on shifting to electric vehicles and would not be stepping up production rates too far for combustion engine models.

We expect the current COVID situation would be only a “transitory” negative, with the impact mitigated by the order backlog.

Investment Thesis

FY21 was a strong year for GUD with robust end-user demand across the automotive businesses along with acquisitions supporting future profit growth

GUD is showing another year of strong financial performance

  • Revenue went up by 27.2%, driven by organic growth of 15.2% and recent acquisitions.
  • Reported EBIT up 31.1% to $97.4 million and NPAT up 39.6% to $61 million.
  • The Group Underlying EBIT registered a record operational result of $101.2 million up 25.4%, slightly above the company’s guidance.
  • The Underlying NPAT is also on the upside for the period up by 32.7% year-on-year.
  • “JobKeeper” receipts of $2.8 million, broadly in line with the prior year and more than offset by employee care and financial support programmes and the incremental COVID‐19 operating costs.
  • GUD reported a fully franked final dividend per share of 32 cents which, combined with the 25-cent interim. This represents a full-year payout ratio of 84% of the underlying NPAT.

Stellar year for GUD’s Automotive arm

  • Total sales went up by 34.1%, which is 18.2% from existing businesses and the balance from acquisitions.
  • GUD’s automotive reported a record underlying EBIT of $101.9 million, up 25.8%.
  • GUD completed the acquisition of the ACAD division of AMA Group, excluding the Fluid Drive business, now known as G4CVA, and Australian Clutch Services.
  • Integration with GUD processes is substantially complete.
  • The runway of potential acquisitions remains encouraging.

GUD’s water business Davey more impacted by COVID‐19 than the Automotive business

  • Encouraging revenue result, up by 5.8%, despite the company operating in a very challenging business environment.
  • Export demand from tourism dependent markets was impacted significantly.
  • Idling of production lines due to COVID‐19 lockdown impacted sales and overhead recovery.
  • During the recovery stage, margins were eroded by shift penalties and incremental air freight costs to meet critical order backlogs and seasonal export sales.

GUD exhibits steady cash flow and rock-solid financial positions

  • GUD has substantially increased its inventory in line with the COVID‐19 response plan.
  • Cash conversion of 86.5% was slightly ahead of expectations.
  • GUD raised $75.7 million via an Institutional Placement and Share Purchase Plan to fund the acquisition of G4CVA.
  • However, modest gearing and $42.1 million of available borrowing lines could maintain balance sheet flexibility.

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Source: GUD

GUD Automotive businesses reported revenue growth of 34.1% with all the company’s brands contributing to this growth. Net of acquisitions, organic growth was strong up by more than 18%. The underlying EBIT increased by 25.8%, principally reflecting the increase in sales as well as the acquisitions.  Automotive achieved an underlying organic EBIT growth of 17.6%. “JobKeeper” subsidies of $2.8 million were received in the first half at similar levels to the prior year and did not repeat in the second half of FY21. The Wesfil brand continued its robust revenue growth across both traditional and new product ranges in both wear parts and other automotive parts. The Ryco Filters brand also experienced strong growth, well ahead of car parc growth, benefitting from continual product range expansion, and from an expansion of market share assisted by robust inventory levels.   Furthermore, the Brown & Watson brand also saw strong sales growth across a broad range of product and customer segments including caravan, truck and trailer and other Original Equipment customers. The new warehouse facility in New Zealand achieved its targeted operational efficiency levels in the second half and is now well-positioned to support growth in the region for all the Automotive businesses. The AA Gaskets business saw robust demand across the year although it was challenged in securing supply for some products due to elevated global demand. Disc Brakes Australia has also seen similar domestic demand strength and, whilst export markets were impacted by COVID‐19 earlier in the year, export demand did improve in the second half. Innovative Mechatronics Group (IMG) experienced strong growth in demand for engine management parts but also experienced a significant increase in car electronics repair activity. To support this growth, IMG opened its first interstate repair service operation in Sydney. The planned hybrid battery repair facility was established in the second half.

We have seen the GUD’s automotive business continue to show resilience throughout FY21. Hence, GUD has maintained its inventory levels through the weakest of the COVID‐19 demand period and then hold higher inventory during the recovery stage. This is positioning the group well for the post‐lockdown recovery.

Now regarding the water business, Davey reported revenue growth of 5.8% driven by growth in the Australian and New Zealand markets but reported a disappointing decline in its underlying EBIT of $4 million.   Davey’s “traditionally strong” Pacific and Indian ocean export nations were significantly impacted by a collapse in tourism due to COVID‐19. Most of that demand is yet to recover. A similar pattern also played out for much of FY21 in the Middle East export markets which were also soft due to the impact of COVID‐19 on those economies.  On a positive note, the businesses in Australia and New Zealand grew well within the traditional Davey product lines.

FY21 operating challenges were significant. The idling of production lines during the COVID‐19 lockdown in Victoria impacted overhead recovery at the Melbourne factory, constrained sales and created significant order backlogs. Operating costs were further increased by COVID‐19 manufacturing compliance, running double or treble shifts, paying elevated sea freight rates and utilising air freight to meet order backlogs and seasonal export sales. Incurring higher costs as part of GUD’s deliberate strategy to maximise productivity in a constrained environment as well as to ensure long term access to the important EU export market.

Valuation: GUD will continue to expand in line with its strong market position and long-term sustained organic growth in the Automotive sector

The underlying structural support for the automotive aftermarket sector remains unchanged and we expect that GUD’s strong market position combined with growth in the car park, will be supportive to sustained organic growth for the company’s automotive business.  Likewise, GUD’s capacity to pursue Automotive after-market acquisitions has not altered and the pipeline of opportunities remains quite attractive. However, short term challenges remain. Volatile trading conditions returned in July and have continued into August this year. Looking through the lockdowns, and as GUD cycles a record sales performance in the prior year, our expectation is that GUD’s automotive business organic growth will moderate and normalise over the next few months. With a return to a more normal manufacturing environment, we expect the performance of GUD’s water business to improve in FY22.

We anticipate that a mix of organic growth along with the full-year contribution of the recently acquired businesses will be the key profit growth drivers onward FY22. Although volume growth may continue to be impacted by COVID‐19 lock‐downs and mobility restrictions. Whilst ongoing COVID impacts continue to create uncertainty, the net effect of the tailwinds and headwinds suggest that GUD remains relatively well placed.

For the valuation of G.U.D. Holdings, we have compared the company with what we believe to be businesses operating in the same space.

  1. ARB Corporation Limited – ASX: ARB
  2. PWR Holdings Limited – ASX: PWH
  3. Schaffer Corporation Limited – ASX: SFC
  4. Carbon Revolution Limited – ASX: CBR
  5. RPM Automotive Group Limited – ASX: RPM

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According to our analysis, GUD appears to be at a fair value compared to its peers. Hence, the company’s EV/Revenue is 2.59 times, which is at the lower range of its peers EV/REV of 1.14 times – 10.11 times. The same goes for the Price to long-term sales multiple at 2.4 times. On the contrary, GUD’s long-term P/E ratio is estimated to be 22.4 times at the upper range of its peers’ P/E range of -7 times to 48.4 times.

We are projecting the long-term EV/Revenue to be 2.59x, along with the price-to-earnings towards FY24 to be 22.4 times. Furthermore, we assume that GUD’s price to sales to be 2.4 times. For the “EV Long-term revenue” model, we came up with an implied GUD share price of $11.37, while for the “P/E multiple” valuation and the “price to sales multiple” valuation to an implied share price of $12.83 and $12.70, respectively. This brought us to a weighted average implied value of $12.30 which is about 5.7% above GUD share price at Friday’s closing of $11.63 apiece.

Technical Analysis

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Trend

When we look at GUD’s long-term chart, we can see that the uptrend has been interrupted during August 2018 which led to a 44.5% correction from it’s all-time high at $15.55 per share. One of the key levels we can immediately spot on the weekly chart is the $10.85 – $11 confluence zone which acted as a long-term key support level. This level is also the current price equilibrium which coincides with the capital raising via SPP with new securities issued at $11 per share. This is a very important level in our view as it will determine GUD’s next move, whether a consolidation at the tip of the symmetrical triangle pattern that will lead to a positive outcome or a capitulation that can send the share price to the single-digit territory. GUD’s volatility is expected to fade progressively, in line with the development of the long-term symmetrical triangle pattern. In theory, the symmetrical triangle is a bullish pattern, hence, we can anticipate a breakout above the current top of the range at $13.69 and see GUD rallies back to its all-time high at $15.55, slightly above our target price of $14 per share.

Volume and momentum

Volume has significantly increased since the last 200-day with the 20-day volume average up by 105%. The price action remains bullish in the near term, evolving in a range between $11 and $13 per share.

Trade consideration

  • Market participants might be interested to enter at the key support level of $11 per share.
  • Primary target price above $14 per share
  • Consider reducing exposure below $10 per share
  • It is recommended exiting the trade below $9 per share

Recommendation

GUD has been exemplary in its operating performance during the pandemic crisis. Hence, we have seen the company keep on its earnings growth trajectory despite the unfavourable economic condition. GUD’s financial year has been very active in terms of acquisition-related activity and the automotive business has been a stand-out. We have been positively surprised by GUD’s approach to tackling COVID-19 through a “defence and offence” strategy which appeared to serve the company well. The recent acquisition of Vision X and AutoPacific will accelerate further the expansion of the company to secure its leading position in Australia and abroad. Therefore, we are reiterating a long-term “Buy” for GUD.

 

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