Company Update: GUD Holdings

Thursday, September 26th, 2019

GUD Holdings owns a portfolio of leading brands in automotive aftermarket parts, supporting the servicing requirements of Australia and New Zealand’s car parc of over 17 million passenger vehicles. GUD’s share price is down 35% from its peak in August 2018, reflecting the pincer attack of a soft consumer and weaker Australian dollar. The consumer environment has meant that customers are delaying or trading down in servicing, while the movement in the exchange rate has increased the largely USD denominated cost of goods sold. The stock is now trading on a 14.5x FY2020 PE, compared to a three year average of 16.6x, and offering a 5.8% fully franked dividend yield.

In FY2019, GUD reported 1% organic automotive revenue growth and management is guiding to only modest EBIT growth in the current financial year. While this is below historical growth rates, the business has proven to be more resilient than businesses servicing new vehicle sales, with car sales down 9.5% in FY2019. This reflects the fact that demand for GUD’s products comes from the full car park of 17 million-plus vehicles on the road, rather than the 0.8 million of annual new passenger vehicle sales.

Part of the weakness that GUD experienced in FY2019 sales, particularly in the second half, related to retailers reducing inventory. A more normal pattern of ordering by retailer customers would result in improved sales for GUD, even without a pick up in end-customer demand. To the extent that recent weakness has resulted from consumers extending the time between servicing, the recovery in demand should be only a matter of time. 

The exchange rate is increasing GUD’s cost of goods sold and thereby pressuring the company’s gross margins. For the most part, this has been offset by incremental price increases, but in certain brands, the company has held fire to maintain the support of customers and relativity with OEM pricing. Post result, there has been constructive commentary on price rises by other industry players, including Bapcor. If OEM’s respond to the pressure on their gross margins, this could open the opportunity for GUD to recoup the impact of the lower Australian dollar.  

In FY2019, GUD achieved an EBIT margin of 20% and a return on invested capital of 18%. This attests to the strength of GUD’s brands and is indicative of a high-quality business. The balance sheet is also relatively healthy, with net debt / EBITDA of 1.5x. Given currently elevated valuations across the Australian equity market, a business of this nature trading on a sub 15x PE multiple is worth considering. 

Stock price: $9.75

FY2020e dividend yield: 5.8%

Franking: 100%

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