I cursed capital-city traffic on a recent trip to a nearby suburb. The drive, normally 15 minutes, took an hour because of congestion, roadworks and poor infrastructure.
It was no surprise. I have written about the trend of city densification for The Bull – and highlighted stocks, such as National Storage REIT, that will benefit as urban populations balloon in the next three decades.
If Melbourne is congested now, what will happen when its population doubles by 2050 and the Victorian Government, and others like it, cannot agree on infrastructure, let alone pay to build enough of it? Sydney, too, is becoming one of the world’s traffic-congested cities.
More people will be forced to live on urban fringes and commute to town by car each day because rail infrastructure is lacking. That means extra time spent in cars, heavier wear and tear on them, and more spent on petrol and car servicing.
At the same time, super-low interest rates (and zero finance deals at some car companies) contributed to a new record for car sales in Australia in 2015.
Those who own new cars are likelier to service them at the recommended kilometres, partly to keep their warranties, and further time on the road means car services are needed anyway. I envisage cars becoming cheaper to buy upfront, and much higher maintenance costs along the way providing annuity-like income to the industry.
This trend is good news for auto-parts provider Burson Group. I first identified the company for The Bull readers in July 2014 when it traded at $2.17 in “3 IPOs for speculative investors”. Burson now trades at $4.80, has good long-term prospects, and still looks reasonably valued despite stellar price gains.
Chart 1: Burson Group
To recap, Burson listed on ASX in April 2014 after raising $220 million in one of the more anticipated Initial Public Offerings. Its $1.82 issued shares quickly traded above their issue price and have not looked back since the float.
Burson is Australia’s largest trade-focused automotive-parts distributor, distributing to more than 30,000 workshops and customers in the wholesale and retail segments. The Victoria-based company has built a huge network of suppliers, distribution centres that provides a significant advantage.
This scale means it can supply parts faster to workshops, enabling them to service cars on a same-day basis and get more volume through the workshops. Smaller parts suppliers struggle to match Burson’s speed, parts range and the breadth of its network.
The ability to service cars quickly is critical in a time-poor society. As commuters lose more of their life to traffic congestion, they cannot afford to be without a car for a day or two. Burson’s speed helps mechanics improve their end service to customers and lift profits.
It this week reaffirmed its February guidance of after-tax net profit of $41.5-$43 million for 2015-16 at an investor day. That equates to earnings per share growth of 24.5-29 per cent – impressive in the context of a market struggling to grow earnings.
Burson said third-quarter trading was strong, with same-store sales up 4 per cent at Autobarn and 4.5 per cent in Burson Trade. It needs strong growth to justify its rising valuation, but everything appears to be on track.
Burson has plenty of balance-sheet firepower and surplus cash flow to keep acquiring businesses and further strengthen its competitive position. This industry is all about scale: as Burson adds more business, it creates greater synergies and cost savings – evident in its 2015 acquisition of Metcash Auto (since renamed Aftermarket Network Australia).
Burson has big growth targets for its store network. It wants 200 auto-parts trade stores by 2021, from 143 today – and 200 Autobarn retail stores by then, from 113 now. Its Opposite Lock four-wheel drive accessories business also has strong growth forecasts.
The bigger picture is more brands, more stores and greater economies of scale in auto-parts distribution to wholesale and retail customers. And a stronger “economic moat” that makes it harder for new market entrants to compete with Burson.
If Burson pulls it off, it will be worth a lot more in the next five years than it is today.
It’s not cheap. At $4.80, it trades on a forecast Price Earnings (PE) multiple of 21.8 times 2016-17 earnings, consensus estimates show. That looks high for a small-cap company with only two years of history as a listed entity.
Three of four broking firms that cover the stock have a buy recommendation and one has a hold. A median price target of $5 suggests Burson is fully valued, but I believe it can do better than the market expects in the next 12-18 months and that its earnings growth profile and market position justify the PE multiple.
Gains will be slower from here and a period of share-price consolidation or pullback would not surprise as Burson approaches broker valuation targets.
That could be an opportunity to buy one of the market’s more impressive small-cap companies and, perhaps, find a little solace in capital-city congestion as it increases demand for car services and auto parts.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply any stock recommendations or offer financial advice. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at April 20, 2016.