Automotive aftermarket parts specialist Burson Group Ltd (ASX: BAP) has released a solid set of earnings results for the first-half ended 31 December, 2015. The shares rose as much as 7.1% shortly after the market opened.
Before diving into the report however, it's worth noting that Burson Group is a different company to the one it was this time last year. While it was only operating as a parts and components distributor then, it has since expanded into the wholesale, chain workshops and retail distribution sections of the supply model thanks to its acquisition of Metcash Limited's (ASX: MTS) automotive division. The effect of this transaction can be seen in the chart below:
As such, it's worth having a look at how both sections performed during the first-half.
Burson Trade
Burson Auto Parts represents the traditional trade segment of Burson's business, which sources and delivers vehicle parts for mechanics and other workshops. The major acquisition of Metcash's division, which has since been renamed "Aftermarket Network Australia", or "ANA", certainly didn't take the attention or execution away from this part of the business.
Same store sales (SSS) from the segment rose 4.5%, with sales rising 9.7% overall to $202.9 million thanks to new store additions. It also contributed $23.4 million in earnings before interest, tax, depreciation and amortisation (EBITDA), which was a 10.3% improvement on the prior corresponding period (pcp).
There was also another improvement to the all-important gross margin to 45%. Excluding freight, this figure was 1.7% higher than in the pcp, while there was a 0.8% improvement on the prior half. This came despite "some competitive pricing" in the market – particularly in Western Australia – as well as rising supplier prices due to the weaker Australian dollar.
Given the nature of Burson's products (and the fact that their customers are the workshops, not the car-owners themselves), Burson was again able to pass these costs onto the customers, allowing the lift in margins.
Aftermarket Network Australia ("ANA")
The acquisition of ANA was completed early in the period, and the group's CEO, Darryl Abotomey, said its performance so far has been "ahead of expectations." While the store count remained mostly flat during the period, management's focus was predominantly on integrating the business into Burson Group, which has reportedly been smooth.
It seems that the highlight from the business thus far has been Autobarn, which experienced SSS growth of 5%. While sales also increased from the Australian Automotive Distribution Group, its gross margin did come under some pressure as a result of the lower Australian dollar, the costs from which have yet to be passed onto customers.
ANA contributed revenue of $120.6 million and $13.9 million in EBITDA, bringing the group total to $322.2 million in sales and $34.5 million in EBITDA (note that $2.8 million in EBITDA was excluded due to inter-company transactions).
The Outlook
As it stands, Burson's management team are confident of another strong performance in the second half – driven in part by a general selling price increase that was implemented in January as well as the opening of more stores – although the gross margin from the specialist wholesale business could remain under pressure.
Meanwhile, it noted: "The Burson Group has a number of "optimisation projects" to maximise the opportunities available to both BT and ANA as a result of the ANA acquisition. The "optimisation projects" being undertaken will see some small synergy benefits in the later stages of H2 FY2016, with larger benefits beginning in FY2017 and beyond."
It has guided for full-year net profit after tax (NPAT) to be between $41.5 million and $43 million – compared to $23.1 million in financial year 2015 – while pro-forma earnings per share (EPS) is forecast to be between 17.04 cents and 17.66 cents.
Should you buy?
Of course, there are risks involved with owning the shares. To begin with, competition (including from Repco) is an issue which could crimp Burson's margins if management lose focus. Continued growth from the business could also depend largely on growth in SSS which, if they were to fall away, could put a dent in the share price.
That said, I think Burson Group is a great business (I own shares in the business – see the disclosure below) and think that it could still be a great long-term investment for investors looking to get involved today.
