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Date : 15/08/2022

GUD Holdings

ASX :

GUD

Market Cap : 1.26 Billion

Dividend Per Share : $0.39

Dividend Yield : 4.30 %

Buy

52 Week Range : $7.46 - $13.17

Share Price : $8.94

As suppy chains ease, GUD will benefit from pent up demand for its products. We recommend a 'Buy'.

Company Analysis

GUD Holdings (ASX: GUD) delivered FY22 results in line with recently revised guidance. Revenues for the full year increased 50% to $835.5 million, largely driven by acquisitions.

Organic revenue increased 7.8% on the prior year, a pleasing result given the COVID impacts experienced throughout the year, in addition to cycling strong COVID-19 recovery sales achieved in FY21.

The group reported Statutory NPAT of $27.3 million, down 55.2% on the prior year, reflecting non-cash impairments within Davey. In addition, the result includes $5 million of acquisition costs which largely relate to APG and Vision X. Highlights in the results include:

  • Underlying NPAT of $88.9 million increased 38.9% from the prior year.
  • Underlying EBITA of $149.5 million increased 47.1% from the prior year, in line with revised guidance.
  • Corporate costs increased to $8.4 million, reflecting change in some costs and investments to support the larger group.
  • Cash conversion of circa 79% reflects the strategic commitment to increase inventories to address elongated shipment times and increase market share.

A fully franked final dividend of 22 cents per share (cps) was announced, representing 62% of full-year Underlying NPAT and reflecting the previously communicated desire to reduce gearing following the acquisition of APG.

The full-year dividend amounts to 39 cents, and at current price levels, this is a fully franked dividend yield of 4.38%.

Automotive Parts Underpin Results

The Automotive (ex APG) businesses reported very strong revenue growth of 29.8%, predominantly driven by the acquired businesses: G4CVA, ACS and Vision X.

Organic growth of 6.5% was particularly pleasing given these existing businesses were cycling a strong 18% growth in FY21.

Automotive (ex APG) underlying EBIT of $127.4 million increased 28.5% on the prior year, driven by acquisitions, and Organic Automotive underlying EBIT was $105.6 million, up 10.5%.

Most of the existing Automotive businesses achieved strong growth over the prior year despite ongoing COVID disruptions, again demonstrating the resilience of the business.

The strategic decision to invest in additional inventory to support new products or enable supply continuity under unpredictable supply chain conditions helped to fuel this growth.

BWI experienced strong growth as it continued to benefit from strong demand from caravan, truck and trailer and other Original Equipment customers. A strong product development pipeline across key brands, including Projecta and Narva, supported the growth and positioned the business well for FY23.

APG

The acquisition of AutoPacific Group (APG) was announced at the end of the first half. The combination of APG and GUD’s existing brands creates the second largest 4WD accessories and trailering business in Australia and New Zealand.

In the second half and since the acquisition, APG has secured 41 new business awards representing $14m+ in revenue, of which $11m+ (78%) is incremental revenue.

APG has managed to step in and win new trailering contracts from caravan and RV OEMs, supporting the growth aspirations in this future category for APG. Putting aside the transitional supply constraint issues, the prospects of APG and its ability to capture more new business is positive.

Davey’S strategic process IS nearing completion

Davey reported strong revenue growth of 11.9%, driven by an expected acceleration of growth in H2 following substantial changes to the inventory profile and safety stock levels, as well as a change to warehousing to improve service levels.

Davey’s strategic process is nearing completion, with the business undergoing substantial people and process changes in FY22. There has been a senior leadership refresh aligned to a sales and profit improvement plan. Revised processes to improve customer service and drive sales have been put in place, and this was evident in the acceleration of sales growth in H2.

Finally, inventory was increased in H2 to substantially lift finished goods levels in support of customers, which also contributed to growth in H2.

Financial Position

Net debt of $467 million represents an increase of $320.8 million from the prior year to support the acquisitions of APG and Vision X. The group’s borrowing lines now range from two to twelve years of maturity and provide a broad debt funding base. There is no significant refinancing due until FY24.

The balance sheet is in a solid position with a high proportion of fixed, longer duration debt and circa $150 million of un-utilised debt facility capacity and borrowing covenant limits. The group remains focused on the short-term target of reducing the leverage ratio to below 2x.

Trading Update

Automotive sales have started positively across many of GUD’s legacy aftermarket businesses, reflecting demand for solid wear and repair parts. GUD’s strategically higher inventory position allows our brands to capitalise on this demand. Independent workshops continue to have strong bookings and are confident about demand. However, they remain concerned about staffing and Covid-19-related absenteeism. Pricing increases offset cost increases through Q1 and Q2.

APG sees Q1 OEM orders that remain muted due to component supply constraints. That said, we expect Q1 FY23 to improve slightly versus Q4 FY22. Further, the new Ford Ranger rollout leads us to expect further improvement through Q1 and Q2 (noting the constrained supply environment).

Water is witnessing strong demand into FY23, with sales starting positively. Cost inflation has prompted further price rises in Q2 FY23.

Outlook

We believe the automotive aftermarket will remain robust, and its growing portfolio is in a strong position to leverage the domestic momentum and further capitalise on the opportunities presented by prospective offshore markets.

The Automotive segment has a portfolio of strong brands, selling products and services that people count on daily. 80% of the products are non-discretionary. The large and proliferated car parts continue their steady growth, creating a defensible position for GUD. As the average vehicle age climbs, the addressable market for wear and tear, service and repair parts grows.

The outlook for APG is strong as sales are projected to normalise to the long-term trend. During the first half of FY23, new vehicle sales are expected to remain subdued due to constrained supply, but OEM sales backlogs remain at record levels.

Deferred demand is set to be realised as the anticipated recovery to long-term trend takes hold in FY23 and FY24. The ongoing supply-constrained trough in sales represents an opportunity for APG as unmet demand is fulfilled. In fact, we expect APG to capitalise on market share opportunities as competitors struggle with operational challenges as supply constraints unwind and deferred demand volumes hit the market.

The previous report can be accessed by clicking here.

Recommendation

GUD has delivered a result as per its revised guidance. They have managed the bottlenecks in their business and weather the storm. These issues have already been priced into the stock price in June 2022. Now, it is a recovery play for GUD and its products. The easing of supply chain pressures will yield elevated sales as there is pent-up demand for its products. The dividends are healthy at a 4.3% yield, and with forecasts pointing towards growth in earnings, dividends should continue to rise as GUD maintains a payout ratio of over 60%. We recommend a ‘Buy‘.

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