AutoPartner 1Q23 Earnings comments

Auto partner annual results and conference call keynotes

The results were strong with sales growth of 25%. In terms of margins, the gross margin increased to 30%, while the operating and net margins decreased slightly. This decrease is mainly due to the receipt of government subsidies related to COVID in 2021.

International sales account for 50% of total sales, with a growth rate of 36% in 2022. We expect international sales to continue to grow at a higher rate in 2023, reducing the company’s exposure to the zloty.

The company’s FCF has been impacted by an increase in capex for the new logistics centre, which will be available in Q3 2025. With a CAPEX/sales ratio of 1%, this is still not a significant amount. This logistics centre is very important for the company’s international expansion, as it is located on the border with Germany and will boost the expansion into Eastern Europe. The NET DEBT /EBITDA remains at 1.4x.

Conference call key points:

They believe it has been a bad year for the industry in Poland, with both new and used car registrations down.

The gross margin of several competitors has been affected in Q4 and although Auto Partner has not been affected yet, they think it is quite likely that the gross margin will decline slightly in Q1 and Q2 and return to normal in Q3 and Q4. This likely impact on the gross margin will come from currency costs. The objective is to maintain a gross margin of 30% in the long term.

In terms of operating margins, we will see a slight decrease in the next few years. As mentioned above, EBIT margin has evolved from 6 % in 2019 to 10 % in 2022, peaking in 2021 at 11%. They will not return to pre-covid margins but will be unable to maintain the margins of 2021 and 2022. I expect margins to be in the 9-10 % range like in 2020.

The management is very optimistic about the company’s growth, as this year’s Q1 growth was 30%. They literally said, “We believe shareholders will be very happy with this year’s results”.

They discussed the impact of the electric car and made comments very similar to our thesis. The product mix will increase and while some products will be affected, such as motor oil, the demand for sensors and other electronic products will increase. In general, electric car parts are more expensive and the management doesn’t believe that the change will have a negative impact on the company. This point is very important as there are concerns among investors about the impact of EVs on the industry. While we have discussed this in the thesis, seeing the board make a similar statement gives us a lot of confidence, which affects the terminal value of the company. When the market realizes this, it could lead to an industry re-rating.

They are going to focus on growing revenue, so by financing working capital, they may have to pay a little more interest in the short term if interest rates stay high.

Preliminary estimated Q1 results

Two days after the conference call, the company released preliminary Q1 results.

Revenue growth of 30.8% compared to 2022.

Gross margin decreased to 26.3% versus 29.5% in 2022, resulting in a 16.7% increase in gross profit.

The operating margin was 7.4% compared to 10.5% last year, resulting in a 6.9% decrease in operating profit.

The net margin was 5.1% compared to 7.8% last year, resulting in a 14.5% decrease in net profit.

Gross margin was impacted by the strengthening of the US dollar against the zloty. The company buys its products in dollars and sells them in zlotys, euros, and other European currencies. The zloty has returned to levels similar to or even slightly higher than last year’s against the dollar. In the first half of 2023, the company will sell the inventory purchased in the second half of 2022, returning to normalized gross margin levels in the second half of the year.

The operating margin was impacted by an increase in employee wages due to inflation. And finally, the net margin was affected by the rising interest rates, leading to an increase in the cost of financing.

Expectations

For FY2023, given the strong growth in Q1 and management’s sentiment, I expect the company to beat the estimates in the thesis and grow above 20%.

Both gross and operating margins should normalize in the second half. The net margin will remain under pressure as long as interest rates remain at current levels. In the long term, we can expect the company to continue to grow at 15% or more over the next few years. With the company trading at a P/E ratio of 11 and an EV/EBITDA ratio of 9, we can expect at least a similar 15% annual return without the need for a re-rating.