I'm always interested to see what moves the respected fund managers make, as it could point to what the next hot stock will be.
Paradice Investment is one of Australia's higher-performing fund managers and today it announced that it became a substantial shareholder of Bapcor Ltd (ASX: BAP) on 14 May 2018.
Bapcor is Australia's largest auto parts business with its Burson and Autobarn chains.
Burson is the key business, it has a lot of car parts in its stores – these parts can be delivered to mechanics in under two hours, which is an excellent delivery time. This is one of the main lines of defence against online retailers like Amazon because Burson has built up a strong distribution network and loyalty with mechanics.
Autobarn is more about servicing the general public's needs with parts. It can help people who want to do it themselves or people who aren't good with tools.
Bapcor also has a number of other smaller specialist businesses like electrical specialists.
I think there are several reasons why Paradice is interested in Bapcor:
- Quality management – The Bapcor leadership have done an excellent job of expanding the Bapcor business in Australia and New Zealand through a number of well-executed acquisitions.
- Profit margin improvement – The management have also done a good job of growing the profit margins of the new and existing businesses through synergies and economies of scale. For example in the half-year result the pro-forma continuing operations earnings before interest, tax, depreciation and amortisation (EBITDA) margin increased from 11.3% to 11.4%.
- Store growth – Bapcor is doing well with its current store networks, but it's expanding the total number. It plans to grow the number of Bursons from 163 to at least 200 and the number of Autobarns from 124 to 200.
- Asia – The company is just starting to expand into Asia with its first store this month with another four or five planned for the rest of the year. If Asia proves to be profitable then Bapcor could really upscale in magnitude due to the population size of the region.
Foolish takeaway
Bapcor is predicting profit growth of around 30% in FY18, which seems good to me considering it's trading at 27x FY17's earnings, which means it's trading with a PEG ratio of under 1, which is normally a good sign of value. Although the share price has risen well in recent times, I think it could still be good value for the medium-term. There is a question mark over the future with electric cars, but that's many years in the future.
