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Date : 22/06/2022

GUD Holdings

ASX :

GUD

Market Cap : $1.12 Billion

Dividend Per Share : $0.49

Dividend Yield : 6.38 %

Buy

52 Week Range : $7.46 - $13.17

Share Price : $7.67

A minor roadblock for GUD. However, medium-to-long term outlook and dividends remain positive.

Company Analysis

GUD Holdings (ASX: GUD) last week announced a trading update where they decreased their earnings guidance from $155-$160 million to around $147 million. The lockdowns in China and the war between Russia & Ukraine have exasperated the semiconductor shortage and thus low vehicle supply. These supply chain constraints and price increases have led to the guidance downgrade. Given the general volatility and market scare, investors over-reacted, leading to GUD shares losing about 20% in the past week.

GUD Holdings 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 it operates.

At GUD’s Investor Day on 8 April 2022, GUD provided a trading update that outlined sustained momentum in the legacy automotive businesses and a positive start to the Vision X and APG acquisitions. This was achieved despite heightened operational challenges and costs, particularly regarding the supply chain. Consequently, FY22 Group guidance of underlying EBITA of $155 to $160 million was reaffirmed at that time.

Headwinds Impacting GUD

Since the Investor Day, the legacy Automotive businesses have continued to see solid demand and the strategically higher inventory levels have supported aftermarket sales growth. Supply chain lead times remain elevated and, in some cases, have increased since the April update. This is primarily due to the impacts of the protracted Ukraine conflict and the strict southern China lockdowns that are only beginning to diminish. Consequently, inventory levels are not expected to moderate, at least into H1 FY23.

The businesses that mainly serve new vehicle sales, especially APG, started to see a significant slowing in offtake from OEM customers through the latter part of April and May.

Although the underlying demand for new vehicles remains in the range of 1.1 to 1.2 million units, in line with the planning assumptions underlying APG’s CY22 guidance (EBITA of $80-84m), many indicators suggest OEM customers are seeing a significant slowing in vehicle supply. This has been evident in new car registrations in April (down 12.2% on the pcp) and May (down 6.4% on pcp).

While the positive YTD segmentation trends have continued, GUD has seen Pickup volumes drop 9.2% and 5.5% over April and May. This is a significant change from the March YTD pickup volumes that were up 8.3% relative to the pcp.

Supply constraints across varying OEM nameplates have seen wide sales variability of vehicles important to APG, such as the existing Ford Ranger (down over 12% YTD May) and the new Toyota Landcruiser (down almost 40% YTD May). Furthermore, certain OEM vehicle launch timings and volumes have been impacted, resulting in further unmet demand. The overall mismatch in supply and demand is reflected in increases in dealer order backlogs to historically high levels, as reported in recent FCAI, OEM and Dealer Group disclosures.

Recent OEM orders for APG products relating to existing and soon-to-be-launched vehicles suggest this pattern will continue at a minimum through June and July. As a result of the impacts outlined above, GUD anticipates FY22 Underlying EBITA of circa $147 million – a 7% downgrade.

Roadblock on the Road to Recovery

The demand for 4WD is robust. More Australians are looking to buy cars. However, this industry, like many others, has been impacted by global supply chain issues. Ukraine manufactures about 50% of the world’s neon gas supply, which is a vital input in the manufacture of computer chips. This, coupled with the fact that Chinese lockdowns have an impact on supply, means that the supply side dynamics have changed, especially when it comes to manufacturing OEM parts and accessories such as bull bars, roof racks, etc.

While it will take more time for the supply pressure to ease and GUD’s operating environment to recover, it is not the full story. The impact is more so on GUD’s recent acquisition of APG – a business levered to the OEM market by about 70%.

Medium-to-Long Term Outlook is still Positive

The medium to long-term outlook remains positive as supply constraints unwind to support unmet demand and APG capitalises on the market share opportunities evident within functional accessories and trailers.

GUD’s other operations, such as repair parts and accessories, will not be impacted by this supply chain disruption. The silver lining is that the lack of new cars will increase the need for repair parts and accessories. GUD did say that sales momentum has continued across “legacy” Automotive aftermarket businesses, reflecting solid wear and repair parts demand, aided by GUD’s strategically higher inventory levels.

While costs continue to be challenging, price increases have been rolled out across all businesses to protect margins – further price rises are in place for July and August to offset the inflationary pressures. The automotive aftermarket is expected to remain robust. GUD’s growing portfolio is in a strong position to continue leveraging the domestic momentum and further capitalise on the opportunities the prospective offshore markets present.

Given only the marginal impact on GUD’s earnings, the dividend payout at the end of the year should be relatively unchanged. GUD has a history of paying out 65%-75% of its NPAT as dividends, and this range of 10% should help cushion any impact from the earnings downgrade, which comes in at 7%.

The share price rout following the guidance downgrade has GUD shares trading at just 10x P/E for FY22 earnings estimates. These are heavily discounted prices for a company that consistently delivers on earnings and dividends and holds a market-dominating position.

To read our earlier report on GUD, members can click here.

Recommendation

The supply crunch in semiconductors has slowed down the production of new cars. This has impacted GUD’s recently acquired APG business and led to the firm downgrading its guidance. However, GUD’s repair parts and accessories business remains robust, and the company has been protecting margins by passing on inflationary costs to customers. The over-reaction in the markets has GUD trading at 10x P/E, undervalued by our analysis. Full-year dividends should be relatively unaffected given the marginal downgrade, and we reiterate a ‘Buy‘ recommendation.

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