Investment bank UBS has upgraded Bapcor Ltd (ASX: BAP) to a buy now that the company's offer for Hellaby has become unconditional. The Hellaby acquisition is expected to add a strong New Zealand foothold to Bapcor's portfolio, given Hellaby's portfolio of car and truck brands.
Hellaby also comes with a shoe factory and a resource services business bundled in, which Bapcor intends to dispose of as they are not core to its business. Following the recent announcement, UBS has upgraded Bapcor to buy with a price target of $6.85. The bank is forecasting Earnings Per Share of 24.6 cents and Dividends Per Share of 13.5 cents for Full Year 2017, slightly ahead of consensus forecasts.
So What?
Stepping across the ditch into NZ is a natural move for Bapcor, with the company's growing scale putting it in a strong competitive position both there and at home. Yet the Hellaby acquisition is a roundabout way of gaining a foothold, with the footwear and resources division potentially a distraction for management, especially if they can't be sold.
Hellaby has already sold off a number of non-core businesses over the past two years, which suggests that the reason it hasn't sold its non-core footwear business is because of a dearth of buyers. The profitable resources business might prove easier to sell, but again we're not exactly at a prime time in the commodity cycle for a company looking to offload that type of business.
That suggests to me that Bapcor could end up paying far more than is ideal to acquire Hellaby's automotive business. On the other hand, it also suggests that management is thinking long term, whereby a bridgehead in NZ is an asset that can be exploited for a very long time. So far, Bapcor has been quite disciplined with its acquisitions and I would suggest readers continue to trust management.
With the earnings added by the Hellaby acquisition, Bapcor might well hit $6.85 in the next year or so. However, I think to fixate on a near term price target is to get the company wrong. After all, it is a low growth and boring industry, with the primary driver of earnings coming from acquisitions in recent times. There's nothing wrong with that, but over the long term Bapcor's success should be increasingly about how it manages its distribution network and whether it can successfully negotiate lower prices from suppliers and higher prices from customers.
