3 reasons why the Bapcor (ASX:BAP) share price could be a buy

There are a number of compelling reasons why the Bapcor Ltd (ASX:BAP) share price could be a buy at the moment, including valuation.

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Bapcor Ltd (ASX: BAP) is an interesting ASX share and there could be a few reasons why the Bapcor share price might be worth a spot in an investor’s portfolio.

This business is the largest auto parts operator in the Australasia region. It has a number of different brands under its different segments.

It has four divisions – trade, specialist wholesale, retail and service. The trade businesses include Burson Auto Parts, Precision Automotive Equipment and BNT. Bapcor says it has amongst the widest range of car parts in the world for thousands of vehicle makes and models.

Retail businesses include Autobarn, Autopro and Sprint Auto Parts. The service businesses include Midas, ABS, Shock Shop and Battery Town.

Here are three of the reasons why the Bapcor share price could be interesting to think about:

Defensive

Bapcor can be a defensive business, even in a recession. Car owners may decide to buy a car part rather than replace a car entirely in a downturn. That’s particularly the case in this environment where demand for second hand cars is high and new car sales is limited.

Several months ago, Bapcor said:

The automotive aftermarket is a resilient industry and historically has performed strongly in difficult economic circumstances. Recent trading is another example of its resilience assisted by the increase in sales of second hand cars.

The FY21 half-year result showed revenue was up 25.8% to $883.6 million.

Growing margins

Whilst revenue is growing at a solid double digit rate, the margins are also improving at each level.

When looking at the financials at the business, each profit level grew faster than the last. Half-year proforma earnings before interest, tax, depreciation and amortisation (EBITDA) grew 36.5% to $145.6 million, proforma earnings before interest and tax (EBIT) rose 45% to $106.8 million and proforma net profit went up 54% to $70.2 million.  

The company is achieving scale benefits, without impacting customer-facing element of its businesses.

It’s investing in key systems, technology and processes. In procurement, Bapcor is trying to utilise its scale to improve pricing and terms. Bapcor is leveraging its logistics capability (including building a new distribution centre) to lower logistics costs. It’s trying to be effective about its marketing spending. It also wants to utilise its group company store networks to reach customers and increase its addressable market.

Long-term plans

Bapcor says that it has a number of avenues to drive the performance of the business including further network growth, realising operational efficiencies and expansion of its own brand product range.

It has acquired a 25% stake of Tye Soon, which is a big distributor of auto parts in South East and North East Asia.

Bapcor has targets to expand its networks to become much larger. For its trade network, it’s targeting 240 stores, with it sitting at just over 190. For Autobarn, it’s targeting 200 stores and it has just over 130.

Asia in-particular is a large market with a big goal of over 80 stores, when it currently has just six in Thailand.

What’s the valuation?

The Bapcor share price is valued at 21x FY21’s estimated earnings according to Commsec.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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