GUD Holdings Limited

Company Overview: GUD Holdings Limited (ASX: GUD) is involved in the distribution and sale of automotive products, pumps, pool and spa systems, and water pressure systems. The company owns a portfolio of companies in the automotive aftermarket and water products sectors. GUD’s operations are located in several countries, including Australia, New Zealand, and France. The company was listed on the Australian Securities Exchange on 30^th June 1962.

GUD Details

Decent Long-term Outlook Supported by Growing Car Parc in Automotive Division:

• Focused on Pursuing Acquisition Growth Opportunities: During FY21, the company reviewed various acquisition opportunities using its refined acquisition criteria and made two acquisitions that were in line with its growth strategy. GUD believes that the acquisition opportunities are still available, and it plans to proceed with calculated caution to pursue its acquisition pathway.
• Expanding Car Parc: Under its Automotive division, the company serves a large and proliferated car parc. In FY21, the company witnessed growth in the 5 years old plus car parc. It expects that the car parc to grow further at a modest and steady rate in the mid-term.
• Improving Top Line Growth: From FY17 to FY20, the company’s total revenue grew at a CAGR of 6.91%, mainly driven by the growth in the automotive business.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

Key Takeaways from FY21 Results:

• Rise in Revenue: In FY21, the company reported total revenue of $557 million, up 27.2% on the previous year, driven by organic growth of 15.2% and recent acquisitions. Notably, the Automotive businesses reported revenue growth of 34.1% underpinned by increase in sales.
• Improved Underlying EBIT: Underlying EBIT for FY21 stood at $101.2 million, up 25.4% on FY20, mainly driven by the growth in the automotive business.
• Completed two Acquisitions: During FY21, GUD improved the scale of its operations by completing the acquisition of ACAD division of AMA Group (excluding Fluid Drive), and Australian Clutch Services.
• Increase in Net Debt: At the end of FY21, the company had net debt of $146.6 million, up by $4.4 million on the pcp. As at 30 June 2021, the company had cash and cash equivalent of $42.6 million.

NPAT Trend (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin and EBITDA margin for FY21 stood at 44.3% and 21.1%, respectively. Net margin for FY21 stood at 10.9%, up from 10% in FY20. ROE for FY21 stood at 18.4%, up from 15.8% in FY20. Current ratio for FY21 stood 2.68x, in line with 2.69x in FY20, demonstrating that the company has maintained its ability to pay short-term obligations. Cash cycle for FY21 stood at 181.4 Days, down from 194.6 days in FY20.

Liquidity Profile and ROE Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 37.99% of the total shareholding, while the top four constitute the maximum holding. Marathon Asset Management LLP and Perpetual Investment Management Limited are holding a maximum stake in the company at 6.91% and 6.10%, respectively, as also highlighted in the chart below:       

(Source: Analysis by Kalkine Group)

Significant Rise in FY21 Dividend: GUD has declared a fully franked final dividend of 32.0 cents per share with an ex-date of 19^th August 2021 and a payment date of 3^rd September 2021. Notably, the final dividend is 166.7%, higher than the dividend paid in the previous corresponding period (pcp). Including the final dividend, the total FY21 dividend stands at 57 cents per share, which is 54.1% higher than FY20. From FY17 to FY21, dividend per share has increased at a CAGR of ~5.51%, demonstrating its focus on rewarding its shareholders via dividends. At CMP of $11.22, the company’s annual dividend yield stood at ~5.07%, which is higher than the 5-year average dividend yield of ~4.16%. GUD’s decent dividend yield and rising dividends are one of the key investment points for dividend seeking investors.

Dividend Trend (Source: Analysis by Kalkine Group)

Change in Substantial Holdings: One of the company’s substantial holders, Maralhon Asset Management LLP, recently reduced its holding in the company from 7.55% to 6.91%.

Key Risks:

• COVID-19 Uncertainties: Due to the impact of COVID-19 pandemic, the export markets are experiencing lower demand, which could impact the company’s profitability.
• Foreign Currency Risk: Since the company is operating in different countries, it is exposed to the risks related to fluctuations in the foreign currency exchange rates.

Outlook: Despite the COVID-19 lock-downs and mobility restrictions, GUD believes that the full year contribution from the acquired businesses, and its focused margin management will be the key profit growth drivers in FY22.  The company believes that its strong market position and growth in the car parc will help in achieving organic growth in the Automotive aftermarket sector. Further, GUD expects that the performance of its Water business will improve in FY22, supported by the improving manufacturing environment.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last six months, the stock has corrected by 13.2% and is trading lower than the average 52-week price level band of $10.19 - $13.69, offering a decent opportunity for accumulation. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peers, considering the uncertainty surrounding the impact of COVID-19 pandemic,          mobility restrictions, lower demand in export markets,  and also taking into consideration that the company has been trading at a discount in the past 3-years over its peer median. We have taken peers like ARB Corp (ASX: ARB), Eagers Automotive Ltd (ASX: APE), and Bapcor Ltd (ASX: BAP), etc. Considering the company’s improved financial performance in FY21, rise in the dividend, expected contribution from the acquired businesses, current trading level and valuation, we give a “Buy” rating on the stock at the current market price of $11.22, (as on 12^th August 2021, 12:20 PM (GMT+10), Sydney, Eastern Australia).

GUD Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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