Bapcor - Morgans

Retail│Australia│Equity research│February 16, 2017

Bapcor Consistently exceeding targets

ADD (no change) Current price:

A$5.75

■

Target price: Previous target:

A$6.38 A$5.91

BAP’s 1H17 result w as c2% ahead of our EBITDA/EBIT forecasts w ith stronger than expected margins across the board offsetting softer SSS grow th w ithin Retail.

■

Pleasingly, guidance for the base business (exc. HBY) w as upgraded to c31-35% NPAT grow th in FY17 (from +25-30% previously); w hile the EPS accretion from HBY w as confirmed at c12% (annualised).

■

We w ere reassured by the flow -through of material synergies from the ANA and the strong performance of recent, smaller, acquisitions. Importantly, w e believe that further material synergies w ill materialise from the HBY acquisition in FY18/19 (quantification of w hich provides a key upcoming catalyst).

■

Today’s result provides us w ith further confidence in BAP’s grow th profile, management execution and a consistent ability to outperform targets. Add.

Up/downside: Reuters:

10.9% BAP.AX

Bloomberg: Market cap:

BAP AU US$1,225m A$1,597m US$6.09m

Average daily turnover:

A$8.58m 40.88m 80.0%

Current shares o/s Free float:

Price Close

Relative to S&P/ASX 200 (RHS)

7.00

145.0

6.50

136.7

6.00

128.3

5.50

120.0

5.00

111.7

4.50

103.3

4.00 8

95.0

6

Vol m

4 2 Feb-16

May-16

Aug-16

Nov-16

Source: Bloomberg

Price performance Absolute (%) Relative (%)

1M

3M

12M

-2.2 -3.4

13 3.8

35.6 17.1

Josephine LITTLE T (61) 7 3334 4505 E [email protected]

1H17 result – a solid result BA P posted a strong 1H17 result that w as c2% above our forecast. Key highlights of the result include: 34% revenue grow th; increased GM (+150bp on the pcp to 45%); and 42.5% profor ma EBITDA grow th (reflecting recent acquisitions and a full 6- month contribution from A NA). While Trade comps w ere buoyant at +5% (+4.5%/+5.5% 1Q/2Q), Autobarn w as low er than our expectations at +2.8% ( +4.5%/+1.1% 1Q/2Q) due to a w eaker Christmas/New Year period (timing) and aggressive competition (price discounting and promotional activity). It w ould appear this softer trend persisted into January (w ith Trade also citing a softer month).

Core NPAT guidance upgraded c4% and HBY well on track Despite the slightly slow er start to the 2H, BA P has upgraded its FY17 guidance (exc. HBY) to A$57-59m (vs previous guidance of A$54.5-56.7m). This equates to NPA T grow th of 30.7-35.3% vs previous guidance of +25- 30%. The key dr iver of the upgrade is higher than expected margins w ith synergies from the optimisation program flow ing through nicely (A$5.0-7.0m expected in FY17) and outperformance by recent, smaller acquisitions. Additionally, the recent HBY acquisition is expected to contribute A$8-12m across its divisions in 2H17, equating to A$68m NPA T at the mid-point of guidance (in line w ith Morgans new forecast). We continue to view the HBY Contract Resources and Footw ear businesses as non-core and put these earnings below the line w ith FY17. We also continue to assume both businesses are divested in FY18 for cA$111m.

Synergy prize on offer within HBY – upcoming catalyst While management is yet to quantify any potential synergies from the HBY acquisition (w e expect this may be articulated before FY17-end), w e expect it could be a meaningful figure. Indeed, extracting synergies from the HBY integration should be a more seamless process vs the ANA acquisition. We are yet to for ecast any HBY synergies, but note this poses further upside risk to our forecasts in FY18/FY19.

Even more confidence post result: Add rating & A$6.38 PT

Post BA P’s FY17 guidance and divisional commentary, o ur nor malised EPS forecasts increase by 4.5%/7.0%/6.0% in FY17/18/19. This sees our blended valuation r ise to A$6.38 (from A$5.91). Today’s disclosure and core business upgrade provides us w ith even more confidence in the grow th outlook and management’s ability to execute w ell and extract synergies despite being highly acquisitive in recent years. Likely HBY synergies provide further upside risk to our forecasts and valuation. Articulation of these (possibly prior to FY17-end) provides a key upcoming catalyst. Financial Summary Revenue (A$m) Operating EBITDA (A$m) Net Profit (A$m) Normalised EPS (A$) Normalised EPS Growth FD Normalised P/E (x) DPS (A$) Dividend Yield EV/EBITDA (x) P/FCFE (x) Net Gearing P/BV (x) ROE % Change In Normalised EPS Estimates Normalised EPS/consensus EPS (x)

Jun-15A 375 41.5 23.12 0.14 19.2% 40.69 0.09 1.55% 20.07 NA (40.4%) 3.52 12.7%

Jun-16A 686 78.2 43.58 0.18 26.3% 32.22 0.11 1.91% 19.57 NA 34.3% 3.83 13.8%

Jun-17F 988 114.4 67.99 0.25 41.4% 21.72 0.13 2.20% 16.69 NA 61.5% 2.64 14.3%

Jun-18F 1,243 151.1 85.08 0.31 21.5% 18.48 0.17 2.93% 12.01 NA 34.7% 2.53 14.0%

Jun-19F 1,342 165.6 94.38 0.34 10.9% 16.91 0.19 3.25% 10.79 25.68 28.3% 2.36 14.4%

1.07

1.04

0.97

SOURCE: MORGANS, COMPANY REPORTS IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS Powered by the EFA Platform CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

Retail│Australia│Equity research│February 16, 2017

Figure 1: Financial Sum mary Profit and loss Revenue Total Operating Costs EBITDA Depreciation Amortisation & impairments EBIT Net Interest Income Pre-tax Profit Tax Normalised Profit Exceptional items Reported NPAT

Jun-15A Jun-16A Jun-17F Jun-18F Jun-19F 375.3 685.6 987.7 1,242.9 1,341.7 122.5 224.8 619.9 806.7 859.5 41.5 78.2 114.4 151.1 165.6 -5.2 -10.1 -13.5 -18.1 -20.7 0.0 0.0 0.0 0.0 0.0 36.3 68.1 100.9 133.0 144.9 -3.4 -4.9 -10.6 -11.9 -10.6 32.9 63.3 90.3 121.1 134.3 -9.8 -18.5 -27.1 -36.0 -39.9 23.1 44.7 63.2 85.1 94.4 0.0 1.1 -4.8 0.0 0.0 23.1 43.6 68.0 85.1 94.4

Cash flow statement EBITDA Net interest Tax Changes in working capital Operating cash flow Capex Free Cash Flow Acquisitions and divestments Other Investing cash flow Investing cash flows Increase / decrease in Equity Increase / decrease in Debt Dividends paid Other financing cash flows Financing cash flows

Jun-15A Jun-16A Jun-17F Jun-18F Jun-19F 41.5 78.2 114.4 151.1 165.6 -3.2 -4.0 -10.6 -11.9 -10.6 -3.6 -18.0 -27.1 -36.0 -39.9 0.0 -18.0 -19.0 -14.8 -19.9 34.6 38.2 57.6 88.5 95.2 -9.3 -14.2 -15.0 -17.5 -18.1 25.3 24.0 42.7 70.9 77.1 -3.3 -295.5 -311.5 111.0 0.0 0.4 0.5 -122.5 110.0 0.0 -12.6 -309.2 -449.0 92.5 -18.1 159.8 54.3 181.3 0.0 0.0 -74.0 148.8 262.0 -121.0 -15.0 -6.5 -23.7 -29.5 -39.8 -49.1 -4.1 -1.4 0.0 0.0 0.0 75.2 177.9 413.8 -160.8 -64.1

Balance Sheet Assets Cash And Deposits Debtors Inventory Other current assets Total Current Assets Fixed Assets Investments Goodwill Intangibles Other non-current assets Total Non-Current Assets TOTAL ASSETS

Jun-15A Jun-16A Jun-17F

Liabilities Short Term Debt Creditors Other current liabilities Total Current Liabilities Long Term Debt Other Debt (inc hybrids) Other Non curren liabilities Total Non -Current liabilities TOTAL LIABILITIES Equity Issued capital Retained earnings Other reserves and FX TOTAL EQUITY

Jun-18F

Jun-19F

107.9 33.4 77.2 0.0 218.5 23.1 0.0 99.9 0.0 12.8 135.7 354.2

22.4 87.3 163.0 0.0 272.7 36.2 0.0 348.8 0.0 25.7 410.7 683.4

49.7 102.8 217.3 0.0 369.8 349.2 0.0 456.3 0.0 40.7 846.2 1,216.0

69.8 129.4 248.6 0.0 447.8 237.6 0.0 456.3 0.0 41.7 735.6 1,183.4

82.9 139.7 268.3 0.0 490.9 235.0 0.0 456.3 0.0 41.7 733.0 1,223.9

0.0 68.5 16.5 85.0 0.0 0.0 2.3 2.3 87.3

0.0 121.5 33.3 154.8 148.2 0.0 14.2 162.4 317.2

0.0 172.3 33.3 205.5 410.2 0.0 14.2 424.4 630.0

0.0 215.4 33.3 248.6 289.2 1.0 14.2 304.4 553.1

0.0 225.6 33.3 258.8 274.2 2.0 14.2 290.4 549.3

337.4 -70.9 0.4 266.9

416.4 -51.1 0.8 366.2

597.7 -12.5 0.8 586.0

597.7 32.7 0.8 631.3

597.7 78.0 0.8 676.6

Valuation details Share Price Price Target Upside to Target Total Shareholder Return

$5.75 $6.38 10.9% 12.5%

Market Cap WACC

Multiple DCF PE Price Target Key metrics/ multiples P/E Yield PEG EV/EBITDA

$1404m 10%

Weighting Valuation 50.0% $6.93 50.0% $5.83 $6.38

19x FY18F

Jun-15A 40.7 1.5% 2.1 20.1

Jun-16A 32.2 1.9% 1.1 19.6

Jun-17F 24.5 2.2% 0.6 16.7

Jun-18F 18.8 2.9% 0.9 12.0

Jun-19F 16.9 3.3% 1.5 10.8

2.5% 1.8%

2.7% 1.7%

4.1% 3.0%

6.3% 5.1%

6.8% 5.5%

Per share data Diluted shares on issue Reported EPS (c) Normalised EPS (c) Dividends per share (c) Payout ratio

Jun-15A 163.6 14.1 14.1 8.9 63.0%

Jun-16A 244.2 17.8 18.3 11.0 61.6%

Jun-17F 269.4 25.2 23.5 12.7 50.1%

Jun-18F 277.5 30.7 30.7 16.9 55.0%

Jun-19F 277.5 34.0 34.0 18.7 55.0%

Result quality Gross Cash flow conversion FCF vs. NPAT

Jun-15A 100.0% 109.6%

Jun-16A 77.0% 55.2%

Jun-17F 83.4% 62.8%

Jun-18F 90.2% 83.4%

Jun-19F 88.0% 81.7%

Gearing Net Debt Net Debt / Equity Net Debt / EBITDA (x) EBIT interest cover (x) Invested Capital Enterprise Value

Jun-15A -107.90 -40.4% -2.60 10.62 159.0 832.7

Jun-16A 125.79 34.3% 1.61 14.02 474.0 1529.9

Jun-17F 360.49 61.5% 3.15 9.48 927.5 1909.6

Jun-18F 219.36 34.7% 1.45 11.17 835.9 1815.0

Jun-19F 191.32 28.3% 1.16 13.72 848.1 1787.0

Growth ratios Revenue Operating costs EBITDA EBIT NPAT (reported) NPAT (underlying) EPS growth DPS growth Operating cash flow

Jun-15A 9.9% 10.5% 15.3% 15.0% 19.1% 19.1% 19.2% n/a 59.1%

Jun-16A 82.7% 83.5% 88.3% 87.4% 88.5% 93.5% 29.6% 23.6% 10.3%

Jun-17F 44.1% 175.7% 46.4% 48.1% 56.0% 41.3% 37.8% 15.0% 50.9%

Jun-18F 25.8% 30.1% 32.1% 31.8% 25.1% 34.7% 21.5% 33.3% 53.5%

Jun-19F 8.0% 6.6% 9.6% 8.9% 10.9% 10.9% 10.9% 10.9% 7.6%

Margin analysis EBITDA Margin EBIT margin NPAT margin ROE ROIC ROE less WACC ROIC less WACC

Jun-15A Jun-16A 11.1% 11.4% 9.7% 9.9% 6.2% 6.4% 8.7% 12.2% 22.8% 14.4% 8.7% 12.2% 12.9% 4.4%

Jun-17F 11.6% 10.2% 6.9% 10.8% 10.9% 10.8% 0.9%

Jun-18F 12.2% 10.7% 6.8% 13.5% 15.9% 13.5% 5.9%

Jun-19F 12.3% 10.8% 7.0% 13.9% 17.1% 13.9% 7.1%

Operating cash flow yield Free cash flow yield

SOURCE: MORGANS RESEARCH, COMPANY

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Retail│Australia│Equity research│February 16, 2017

1H17 result summary Figure 2: 1H17 result A$m Total revenue

1H16A

2H16A

FY16A

1H17A

322.2

363.4

685.6

435.1

1H17F Morgas est 434.8

% diff

% chg on pcp

0%

35%

30.9 22.7 0.0 -3.7 49.9 11.47%

0% 13% 0% 89% -1% -1%

32% 84% 0% 438% 43% 6%

EBITDA - BAP Trade - ANA - HBY - Unallocated Group Costs Total EBITDA EBITDA margin

23.4 13.9

28.4 18.4

51.8 32.3

-1.3 34.5 10.71%

-4.7 43.7 12.02%

-6.0 78.2 11.40%

30.9 25.6 0.0 -7.0 49.2 11.31%

Depreciation and amortisation EBIT EBIT margin

4.9 29.6 9.19%

5.2 38.5 10.58%

10.1 68.1 9.93%

6.0 43.2 9.9%

6.0 43.9 10.1%

0% -1% -2%

22% 46% 8%

19.3

25.4

44.7

27.8

29.3

-5%

44%

8.0 5.0

10.3 6.0

18.3 11.0

10.6 5.0

11.3 7.0

-6% -28%

34% 0%

Normalised NPAT EPS DPS

SOURCES: MORGANS, COMPANY REPORTS

Divisional highlights 

A strong result in Trade: Recorded revenue growth of 13.6%, underpinned by +5.0% SSS growth and 11 new store openings in the 1H. SSS growth implies a strong 2Q c5.5% (vs the AGM commentary that 1Q SSS was ‘in excess of +4.5%’). BAP now has 8 trade-focused stores in WA and management noted this market remains very competitive. The Trade GM increased 100bp on the pcp to 46% and was consistent with 2H16. EBITDA for the Trade division was +32.0% to A$30.9m. The EBITDA margin increased 188bp to 13.41% as a result of the optimisation program benefits and operating leverage on the strong top-line outcome.



2Q Retail SSS the only blemish: Retail reported revenue growth of 42.9%, however normalising for the 5-month contribution of ANA in the pcp (vs 6 months in 1H17), revenue was up +18%. Revenue growth was underpinned by LFL sales of +2.8% - which was a clear slow-down from the ‘in excess of +4.5%’ in 1Q17 and implies +1.1% SSS growth in 2Q17. We understand Autobarn was impacted into year-end due to aggressive competition, with price discounting and promotional activity over the key pre-Christmas and Boxing Day periods. Retail gross margins increased due to the optimisation program and conversion of company -owned service workshops to franchises, while EBITDA increased by 42.5% to A$15.0m. Normalising for the 5-month contribution of ANA in the pcp, EBITDA grew +20%. The EBITDA margin remained steady at 17.8%. Figure 3: Divisional SSS grow th assumptions 1Q (AGM update)

2Q implied

1H17A

Trade

4.5%

5.5%

5.0%

4.0%

4.5%

Retail

4.5%

1.1%

2.8%

2.4%

2.6%

SSS Growth

2H17F implied FY17 MorgansE

SOURCES: MORGANS, COMPANY REPORTS



Specialist Wholesale: The annualised revenue run rate is now over A$230m as a result of recent acquisitions made over the last 12 months (Bearings, Roadsafe, Baxters, MTQ). It was flagged that some sales loss has occurred due to customers of the wholesale businesses being competitors to BAP, however this was built-in to management’s business case. The Specialist Wholesale GM was up 400bp due to an improved business mix and better margins at AAD. EBITDA was +144.8%, reflecting contributions from acquisitions. The EBITDA margin improved 90bp.

3

Retail│Australia│Equity research│February 16, 2017

Other points of interest 

Group GM: was 45%, +150bps on the pcp. However, the GM only improved 10bp on the 2H16 outcome of 44.9%, given synergies had started to flow in 2H16. The continued GM improvement reflects the benefits of the optimisation projects.



Group EBITDA: Total EBITDA was A$49.2m, +43% on the pcp. The EBITDA growth from Burson Trade was in line with our forecasts, while the ANA result was ahead due to improved margins (largely due to a stronger top-line outcome, despite lower SSS growth). The ANA result represents a 6 month contribution, compared to 5 months in the pcp (July, which has traditionally been a large profit month for this business). Based on management commentary on the ANA division, we expect that the business contributed A$1.9m EBITDA in July 2015. Normalising for this in the total 1H17 EBITDA growth, group EBITDA was up +35.2% to A$49.2m (vs A$36.4m the pcp).



EBITDA margin expansion: BAP’s CODB as a percentage of sales increased by 90bp to 33.7%. This reflects change in business mix and the higher number of corporate owned retail stores. Trade CODB (as a % of sales) fell 90bp due to the prior year including additional costs related to WA start-ups and costs related to the Brisbane DC. The EBITDA margin increased 70bp to 11.3%.



Operating CF: Working capital was solid (excluding acquisitions) due to improved trade debtor and creditor days. WC (as a % of annualised sales) was 13.0% vs 13.5% the pcp. Maintenance capex was A$5.2m consisted of motor vehicle purchases, IT development and front of store refurbs. Excluding acquisitions, cash generation was positive (A$0.6m).



Balance sheet: Net debt (exc. HBY acquisition & raising) was A$158.8m, equating to 1.6x on an annualised net debt/EBITDA basis. Following the HBY transaction, pro forma Net Debt sits at A$400m, representing an annualised net debt/EBITDA basis of 2.6x. We currently forecast A$111m of net proceeds from the divestment of Resource Services and Footwear in FY18 which would see net debt/EBITDA fall to 1.9x, based on our forecasts.



Dividend: An interim dividend of 5.5c was declared (vs our forecast of 6cps). This was lower than our forecast due to the dividend being paid out of statutory profit, not pro-forma, which is what we had assumed. The interim dividend represents a payout ratio of 60.5% of statutory NPAT. A DRP has been implemented for the 1H17 dividend.

Hellaby’s performance and our forecasts Given that trading of HBY is now suspended on the NZX, BAP announced HBY’s 1H17 result as part of its presentation. The Automotive division reported EBITDA of NZD$14.1m (cA$13.2m). This compares to our 5.5-month forecast Automotive contribution in 2H17 of A$14.8m. Figure 4: Hellaby 1H17 result HBY (NZD)

Sales

EBITDA

EBIT

Automotive

145.6

14.1

12.8

Resource Services

124.2

6.4

1.4

63.9

0.6

-0.7

Footwear** Equipment Elims/Head Office Total Previous HBY guidance

53

2.4

2

-0.6

-2.8

-3

NPAT*

385.8

20.6

12.5

39.9

$383-388m

$18-19m

$10-11m

$38.5-39.5m

SOURCES: MORGANS, COMPANY REPORTS * Includes NZ$34m gain on sale of equipment. ** Includes NZ$2.7 of restructuring costs.

4

Retail│Australia│Equity research│February 16, 2017

Outlook commentary 

Core FY17 NPAT guidance upgraded: BAP has upgraded its FY17 guidance (exc. HBY) to A$57-59m (vs previous guidance of A$54.556.7m). This equates to NPAT growth of 30.7-35.3% vs previous guidance of 25-30%. Given SSS growth slowed within Retail and Trade (in January), the beat is really coming from higher than expected margins across the board.



HBY to contribute A$8-12m in FY17: HBY’s three divisions (Auto, Resource Services and Footwear) are expected to contribute A$8-12m NPAT in 2H17 (before transaction costs and significant items). FY17 EPS growth (including HBY) is estimated to be at least 35%.



Burson Trade: Expects continued underlying growth in Trade (vs ‘solid growth’ previously flagged at the FY16 result). FY17 will benefit from new stores, annualisation of FY16 stores opened/acquired and margin upside (largely from supplier rebates). We continue to expect recent Auto Trade revenue growth rates (c10-12%) will continue while the EBITDA margin should continue to expand due to higher supplier rebates.



Retail: Management continue to expect underlying growth in Retail (vs ‘solid growth’ previously flagged at the FY16 result). We expect wholesale margins to remain flat given FX impacts while the Retail margin should improve incrementally as optimisation benefits flow through.



January trading: On the call, management flagged that January had been impacted as a result of increased competitor discounting and the timing of Christmas/Australia Day. As a result, we have lowered our 2H17 assumptions to reflect a lower sales outcome, in line with management commentary.



Recent acquisitions: FY17 will include a full 12-month contribution from the ANA business, the Specialist Wholesale division and a seven-month contribution from MTQES.

A reminder of our HBY acquisition assumptions Our forecasts are underpinned by the following key assumptions: 

HBY enterprise value of NZ$435m (A$413m), comprising of NZ$351.8m (A$334m) equity valuation and net debt of NZ$82m (A$78m).



Total asset sales of A$111m in early FY18, comprising: o o o

A$51.3m of proceeds from the divestment of Contract Resources, representing a historical FY16 EBITDA multiple of 5x; A$48.5m of proceeds from the divestment of TBS by early FY18, representing the cost price paid for the business in July 2016 (1Q17); and A$11m of proceeds from divestment of the Footwear division by early FY18, representing a historical FY16 EBITDA multiple of 2.5x.

 A 5.5-month contribution from HBA in FY17 – we forecast 4.5% revenue growth and an EBITDA margin to 10.6% (Truck & Trailer Parts business to break even and no one-off costs experienced in FY16). 

We assume cA$3m of HBY overheads in 2H17, in line with management guidance. We assume this falls further to A$1m in FY18.



Inclusion of 5.5-months of earnings from the Footwear and Contract Resources in FY17 (but taken below the line).

5

Retail│Australia│Equity research│February 16, 2017

Figure 5: Morgans’ divisional assumptions and forecasts – FY17-FY19 A$m

FY15A

FY16A

FY17F

FY18F

FY19F

341.6 341.6

375.3 375.3

470.6 414.7 136.2 -28.0 993.5

534.9 458.6 293.6 -33.8 1253.2

596.3 483.4 308.5 -44.2 1343.9

EBITDA BAP MAH HBY - 5 mths in FY17 Unallocated corporate costs Total EBITDA

41.5 0.0 41.5

51.8 32.4 -6.0 78.2

64.0 47.6 14.8 -12.0 114.4

76.8 53.0 32.0 -10.7 151.1

86.8 55.8 34.2 -11.3 165.6

D&A

5.2

10.1

13.5

18.1

20.7

EBIT

36.3

68.1

100.9

133.0

144.9

Net interest

3.4

4.9

10.6

11.9

10.6

NPBT

32.9

63.3

90.3

121.1

134.3

Tax Effective tax rate

9.8 30%

18.5 29%

27.1 30%

36.0 30%

39.9 30%

Underlying NPAT Contribution from non-core assets (pre tax) Transaction costs (pre tax) Reported NPAT

23.1

44.7

85.1

94.4

23.1

-1.1 44.7

63.2 4.8 -8.5 68.0

85.1

94.4

Weighted shares on issue

163.6

244.2

269.4

277.5

277.5

Underlying EPS (cps) Reported EPS (inc. transaction costs) (cps)

14.13 14.13

18.31 18.31

23.45 23.01

30.66 30.66

34.01 34.01

9.9% 88.3% 93.5% 29.6%

164.7% 46.4% 41.3% 28.1%

26.1% 32.1% 34.7% 30.7%

7.2% 9.6% 10.9% 10.9%

20.8% 18.1%

11.5% 10.2%

12.1% 10.6%

12.3% 10.8%

Revenue BAP MAH HBY - 5 mths in FY17 Intercompany sales Total Revenue

Revenue growth EBITDA growth Underlying NPAT growth Underlying EPS growth EBITDA margin EBIT margin

12.1% 10.6%

SOURCES: MORGANS

Changes to forecasts Following BAP’s upgraded FY17 guidance, we have made the following changes to our forecasts: 

Lowered our Trade LFL sales growth to 4.5% (from 4.8% previously) given the citing of slower trading in January and the business will cycle a solid pcp which benefited from price increases (won’t reoccur this half);



Lowered our Retail LFL sales growth to 2.6% (from 4.0% previously);



Lowered our Retail store assumptions for FY17 (we forecast 20 store openings in FY17);



Increased our FY17 and FY18 EBITDA margins to reflect greater than expected Optimisation benefits realised in the 1H and in line with management’s earnings guidance for FY17;



Increased our unallocated corporate overheads in the base business to A$9m and HBY 2H17 costs to A$3m (as per guidance);



Excluded one-off costs from our statutory NPAT forecast to better reflect the contribution from the Footwear and Contract Resources divisions. Oneoff cash costs of A$8.5m (pre-tax) have been flagged for FY17; and



Based our dividend off statutory NPAT (including cA$6m of post tax one-off costs), but including earnings from the non-core CR and Footwear businesses. We have also lowered our payout ratio to 55% given our view that the group needs to de-gear the balance sheet. 6

Retail│Australia│Equity research│February 16, 2017

Figure 6: Changes to forecasts EBIT % change Underlying NPAT % change Reported NPAT % change EPS (¢) % change DPS (¢) % change

Old FY17F

New FY17F

Old FY18F

New FY18F

Old FY19F

New FY19F

96.7

100.9 4.3% 63.2 4.8% 68.0 16.8% 23.5 4.5% 12.7 -7.0%

125.6

133.0 5.9% 85.1 6.8% 85.1 6.8% 30.7 7.0% 16.9 -3.6%

137.4

144.9 5.4% 94.4 5.9% 94.4 5.8% 34.0 6.0% 18.7 -4.6%

60.3 58.2 22.4 13.6

79.7 79.7 28.7 17.5

89.2 89.2 32.1 19.6

SOURCES: MORGANS

Valuation and price target Our DCF/PE valuation increases to A$6.38 (from A$5.91) due to higher earnings forecasts. Key risks include: increased competitive environment; loss of key personnel; timing/integration of acquisitions; underperformance of the ANA/HBY businesses; currency risk. They key upside risk relates to articulation of HBY synergies prior to FY17-end.

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Retail│Australia│Equity research│February 16, 2017

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