AutoPartner Investment Thesis in a Nutshell
- Growing company in the aftermarket auto parts sector
- Growing in a highly segmented European market at a rate of 50%, where it does not even reach a market share of 1%.
- Management with skin in the game and a great track record.
- Business resilient to recessions
AutoPartner Business
Auto Partner is a distributor of spare parts for cars, light commercial vehicles, and motorcycles. Founded in 1993, it has grown from a small company with one warehouse and 3 employees to the second largest and fastest growing player in Poland. This is an easy-to-understand business in a stable industry.
The company acts as a logistics platform. The components arrive at its distribution center in Bieruń Pruszków (43000 sqm) from where they are shipped to the other warehouses, one in (13500 SQM) and a smaller one in Prague (600 SQM). The next step is the network of 115 branches that are covering all regions of Poland and receive the components from its warehouses. These branches enable the company to offer 3 to 5 deliveries per day to the customers, most of them independent workshops. The company operates in more than 30 countries, focusing on Poland (50% of sales) and the nearby countries to be able to deliver in the shortest possible time, which is crucial when choosing the company as a supplier.
The 62% of the sales are placed directly from its online platform, which is crucial for the future and gives it an advantage over smaller peers who still order by phone.
The company offers some private labels on an exclusive basis and is looking to leverage the sales of MaxGear a private label owned by Auto Partner which accounts for 21% of sales and leaves it with much higher margins.
Since 2016, the Group has also been actively developing a .It involves preferential discounts, lease of workshop chain of independent repair shops under the brand MaXserwis equipment, participation in technical training and conferences. The company does not operate the workshops but becomes the main supplier.
AutoPartner Industry Overview
Buyers of vehicle replacement products have the option to purchase from primarily five sources: 1o) new products produced by OEMs; 2o) new products produced by companies other than the OEMs, which are referred to as aftermarket products; 3o) recycled products obtained from salvage and total loss vehicles; 4o) recycled products that have been refurbished; and 5o) recycled products that have been remanufactured. Auto partners operate the second category.
The new products produced by OEMs are mostly used for vehicles that are under warranty as they are more expensive. As the car gets older and the warranty period ends, they tend to move to the other cheaper categories. The age of the car is one of the most important KPI ́s of the industry.
A repair shop’s choice of a wholesaler is based on the price, the product mix and the delivery time. The only way to gain an advantage over rivals is through scale and Auto Partner enjoys it in Poland and nearby countries. This means that every new branch they open places them in a better competitive position.
This is a mature, stable industry with several positive trends in recent years.
The car park is aging. Over the last 10 years, the passenger car fleet’s average age has risen. The average vehicle in Europe is 11.8 years old; in Central and Eastern Europe it is even older. For example, in Poland is 14.3 years and in Czech Republic 15.3 years (source: ACEA, Vehicles in use report, 2022).
The European car park has increased by 1.6% CAGR from 2011 to 2019 and is expected to continue to grow at a slower rate of 0.9% until 2025 and 0.6% until 2030, keeping in mind that these are only estimates and do not have to be fulfilled, but the prospects are good.
Higher prices for parts as the components become more complex and more vehicles come equipped with new technology such as sensors.
The industry also faces certain challenges that will specially hurt small players. Auto partner may appear to be a small player on a European level, but it has enough scale in Poland to adapt to these changes.
Electrification needs fewer replacement parts. Battery-electric vehicles generate about 20% less aftermarket parts spending than comparable fossil fuel cars. The change will take time, especially in lower income countries such as those in which Auto Partner operates.
Safety technology will reduce crashes.
Private-label parts offerings are growing. This will be harder for smaller companies to develop their own bran. In auto partner we have MaxGear.
Online sells are winning share. Again, this is mostly a problem to smaller players.
Polish Market
The Polish market is dominated by 4 players, Inter Cars with around 30% market share and 240 branches, Auto Partners around 10 % market share and 115 branches, Inter Team around 10% market share and 85 branches and H.M. Gordon around 7% market share and 150 branches.
Inter Team was acquired LKQ, the first player at European level.
Inter cars being the leader took a different approach than auto partner. While auto partner wanted growth while maintaining profitability, Inter Cras wanted more scale and this is evidenced by the fact that despite having a higher gross margin of 30.6% vs. 29.1%, operating margins are lower, 7.4% vs. 10.6% last year. Since 2017, when the CEO passed his position to his son, he has entered several worse quality businesses such as the manufacture and sale of semi-trailers and the dealership of vehicles under the Isuzu brand. The number of Inter Cars branches may be a kind of guideline for the size that Auto Partners could reach in the future.
AutoPartner Management
The company is run by its founder and largest shareholder Aleksander Górecki. Between him and his wife they own a little more than 45 % of the company. He has experience in the sector since he founded auto partner in 1993 and he is still 54 years old so we can expect him to continue in charge for the next few years. The alignment with the shareholders is total since his salary is around €40,000 per year, which explains the payment of a small dividend every year that does not exceed 10% of the profit.
The salary of the rest of management is mostly in the form of bonuses for meeting objectives such as improving inventory turnover and long-term growth. The current plan is from 2022 to 2024 and if achieved the bonus will not exceed 6% of current net income. They also own shares in the company. The bonus is fully monetary, and they do not issue shares so there will be no dilution.
Autopartner Growth Strategy
Is based on 4 points:
growth of the business scale.
further product diversification.
further increase in profitability
Expansion into new markets
The company is winning scale with every new branch they open and recently they announced the construction of a new warehouse in Zgorzelec planned to be ready in Q3 of 2025. This new warehouse will support the growth in Western and Southern Europe.
They can also add growth by adding new products such as tires that are not in their mix.
AutoPartner Financials
Debt
The company currently has low debt with a level of NET DEBT/EBITDA =1.3. Usually, they work with these levels of debt to boost growth. 10% of the debt is a loan at a fixed rate of 5% from the CEO to be repaid in 2024 and the remaining debt is a credit facility to finance the working capital.
Revenues
The company consistently achieved growth rates above 20%, except for the pandemic, when other rivals reduced their sales, they managed to increase revenues by 13%
Margin & EPS
Margins have been increasing as the company has been building scale, with the 2021 EBIT bit margin benefiting from government grants due to the pandemic. The normal levels of EBIT margin that we can expect in the future will be between 9 % and 10 %.
2022 numbers are estimates based on first three quarters results + Q4 estimates except for sales that are reported on a monthly basis.
AutoPartner’s Peers
It is difficult to add comparables as most of the companies operating in Europe are privately held or much larger, including LKQ or GPC, which also operate in the USA and trade at higher multiples, but we will see them below.
Autopartner Valuation
Base case
I will use two valuation methods, multiples and DCF. I consider that the most appropriate method is multiples, considering the company can continue to grow for many years but now do not generate excess of cash as it invests most of the cash in working capital. The company trades as of 01/23/2023 at PLN 14.78, based on my estimates of PLN 1.62 it trades at a PE of 9.
we will make the following assumptions:
In terms of growth, the company should continue to grow at similar rates over the next few years, considering the enormous TAM available in the European market, which currently contributes 50% of sales and is growing at 50% per year. We estimate a growth of 20% in 2023, 15% for 2024 and 2025 and a terminal growth of 2%.
We will use a WACC of 11%(9% of my calculations + an extra 2% for small cap risk)
Growth estimates may seem high, but the company made a strong start to the year, with January sales up 34%.
Multiples
Historically, the company has traded at 11.5 times earnings while the Warsaw Stock Exchange has traded at 12 times and Inter Cars at 14 times. Considering that we are dealing with a better than average company that is growing at a high rate, a P/E of 12 seems reasonable. I’m not considering other peers because I don’t expect the company to be trading at the same P/E as other companies such as LKQ who also have exposure to the US.
Based on my estimates of 1,62 PLN and a PE of 12 the company should be worth right now 19.44 PLN a 31 % discount.
Based on the previously stated estimates of growth, we expect an EPS of PLN 2.45 by 2025 with a target price of 29,7 PNL. A 100% return in 3 years.
DFC
Using the DFC, we obtain a target price of PLN 27.06.
Bear case
I’m simply going to list the facts that could cause our base case not to be achieved.
The company might not adapt to the changes explained in the industry section. I believe that the company is big enough to be able to adopt to these changes and they will be problematic, especially for smaller players.
Poor execution by management of the international expansion. So far the results have been excellent.
Increased cost of financing which would make further growth less profitable or slow down.
I don’t believe that any of these events could affect the company’s current business, since it has a strong position in the areas where it operates, but it would be a problem for future growth.
The company trading at 9 times earnings, even if it does not grow, the capital loss should be small.
Risks
Currency risk
Failure to adapt to the changes in the industry described above: I don’t think this is a major threat as this will mostly affect smaller players and Auto Partner has a strong position in Poland.
Poor execution of the international expansion: The management has a great track record and skin in the game, so I am confident in their abilities.
Inflation: So far, the company has been able to pass on the cost increase to customers and I expect it will continue like this in the future.
Conclusion about AutoPartner
AutoPartner is a growth company in a stable business that has historically been resilient to recessions.
The management has skin in the game and a great track record.
Using both valuation methods we have a sufficient margin of safety and a high potential return.
This is a long-term investment. The company will continue to invest all cash in the business until the rate of growth slows down so there will be no cash returns to shareholders in the short term except for a small dividend.
Author: Carlos Aguiar – @carlosag_92
This investment thesis participates in the Moram investment competition. If you want to vote for it, voting will be open for Moram’ subscribers from this Sunday evening (5th March 2023) to next Saturday.
Disclaimer: This thesis is only for educational purposes and does not constitute any investment advice
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