G.U.D. Holdings (ASX:GUD) is a stock we recommended successfully late last year in The Dynamic Investor. More recently, the shares were sold heavily after the Company released results for the six months to 31 December 2023 (1H24). Accordingly, we recently researched the Company in The Dynamic Investor to assess whether current levels present another entry opportunity.
About G.U.D. Holdings
The core operations of GUD comprises only the Automotive segment, which provides a wide range of parts for both the automotive after-market and new vehicles. The Company recently exited from Davey Water Products. This business was involved in the manufacturing and sale of water hardware and treatment products. In FY23, it only comprised ~3% of overall EBITDA.
GUD’s Automotive segment comprises: i) ‘Core’ Automotive, which includes Ryco, IMG, AA Gaskets, DBA, Wesfil, BWI and Griffiths Equipment and ii) ‘Acquired’ Automotive, which includes G4CVA, ACS and Vision X.
The Company’s portfolio of automotive aftermarket companies includes long-standing brands like Ryco, Wesfil and Goss. In recent years, GUD has grown this portfolio with the acquisition of strong brands such as Narva, Projecta, AA Gaskets, Injectronics, and Disk Brakes Australia (DBA).
The acquisition of Auto Pacific Group (APG) in FY22 has created the 2nd largest 4WD accessories and trailering business in Australia and NZ. APG commands strong market share in towing across Original Equipment Manufacturer (OEM), Original Equipment Supplier (OES), and aftermarket channels. APG is reported as a separate segment and is expected to account for around 1/3rd of overall EBITDA in FY24.
Key Fundamental Drivers
Automotive Segment Showing Resilience
For 1H24, the Automotive segment (excluding APG) reported EBITA growth of 5.7%, with a strong performance from the Core business (+7.9%) offset by a -4.3% decline in the ‘Acquired’ business, as GUD undertook a rationalisation of a product range.
The Core business has been reasonably resilient to date in an environment where there is increased risk around service trade down and deferral. Core Automotive EBITA margins were steady at 21.5% supported by both volumes and price increases. The latter helped to offset cost inflation and currency headwinds. The Company expects that there is potential for further price rises in FY25, which is indicative of GUD’s strong bargaining power with customers.
Are APG’s Earnings Targets Still Achievable?
APG’s performance in 1H24 was impacted by two external factors, which have led to the Company providing guidance for APG’s 2H24 earnings to be slightly lower than 1H24. Firstly, the New Zealand government removed the clean car emissions scheme after the election of a new government. Secondly, Toyota, on 29 January 2024, temporarily suspended shipments of a number of models. This followed an investigation into software manipulation by the brand’s engine production arm.
At the time of the acquisition of APG, the Company had outlined a targeted EBITA range of $80-84m by the end of calendar year 2022. APG is not expected to achieve the targeted range until FY26. This is due to volatility in new car deliveries, as well as the NZ & Toyota issues. Having said that, APG’s medium-term earnings outlook is supported by several factors:
i. OEM supply constraints and mix (i.e. APG’s Top 20 customers) continues to impact APG. However, the Company remains confident that APG can deliver its original business case targets once these normalise.
ii. Since GUD’s acquisition, APG have secured 172 new business wins, representing ~$44m+ in revenue. A significant portion is incremental revenue which will progressively come on line in the next two years.
iii. Stripping out NZ, the APG Australia result was solid. While GUD did not disclose specific figures, APG Australia is estimated to have generated ~20% revenue growth (on a year-on-year basis) and strong operating leverage.
iv. APG’s underlying operations continued to win new contracts with existing OEMs for additional accessories on new vehicles.
Increased Balance Sheet Optionality
Gearing (on a net debt to adjusted EBITDA basis) continues to decline, to 1.7x as at 31 December 2023. In comparison, gearing was previously 2.0x as at 30 June 2023 and 2.4x as at 30 June 2022.
The gearing level is now within GUD’s medium-term target of 1.6-1.9x. Gearing is expected to remain within that range in FY24, supported by strong cash conversion, which is expected to return to the typical 85-90% range in FY24.
Accordingly, the current gearing level provides optionality for strategic Merger & Acquisitions (M&A), capital management. Acquisitions are more likely to be on the Company’s agenda, given the delay in achieving the targeted EBITA range for APG. It is also worth noting that GUD has a typically prudent approach to acquisitions.
Fundamental View
GUD shares are currently trading on a 1-year forward P/E multiple of ~12x. This is at the bottom end of the long-term trading range and not demanding in the context of an EPS growth profile of ~8% over FY23-26 on a CAGR basis.
The shares appear to lack a near-term catalyst, given uncertainty around the timing of a recovery in NZ volumes and the magnitude of the Toyota impact. However, we consider these factors to be temporary headwinds. Having said that, one catalyst is increased likelihood of a major acquisition to given the delay in APG achieving its earnings target.
Charting View
The decline last week saw GUD test support near $10.50 and then quickly bounce back up. This bounce off support is very encouraging and it means that GUD is likely to head back up to the top of the recent range near $12.50. Current levels are a buy and investors can look to place an initial stop under the recent lows near $10.80.
Michael Gable is managing director of Fairmont Equities.
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