G.U.D. Holdings Ltd

GUD Details

G.U.D. Holdings Ltd (ASX: GUD) possesses a portfolio of companies that deal in the automotive aftermarket and water products sectors. Its key markets include Australia and New Zealand.

H1FY21 Results Performance (For the Period Ended 31 December 2020)

Strong Rebound in Automotive Demand: Driven by the strong recovery in automotive demand, the company has recorded a  10.7%  YoY rise in its net revenue to $251.5 million during the interim period with the strong rebound reported  in the domestic auto,  while the exports were impacted by the  COVID-19.

Solid Underlying EBIT Growth: Notwithstanding the persistent COVID-19 challenges, the company reported solid growth of 17.6% in its underlying EBIT to $52.3 million from $44.5 million in the previous corresponding period largely driven by margin expansion in the automotive portfolio. This has more than offset the impact of adverse mix and higher freight costs, and incremental COVID-19 operating costs.

Statutory Financial Highlights (Source: Company Reports)

Appointment of Director

The company, on 23 June 2021,  announced the appointment of Professor John Pollaers as the company’s non-executive director. John has a rich experience of more than thirty years with strong strategic skills and experience in manufacturing processes as well as customer relationship management, government relations, among others.

Completion of Acquisition of ACS and Subsidiaries

Acquisition: The company, on 1 March 2021, updated the completion of the acquisition of Australian Clutch Services Pty Ltd (ACS), and subsidiaries XCLUTCH USA Inc and ACS NZ Pty Limited. ACS is a major player in the manufacturing of clutch components and systems and this acquisition provides the company a strategic diversification across customer channels and products. The acquisition is expected to be EPS accretive going forward.

Outlook

Demand Momentum: Although the COVID-19 continues to produce uncertainty, it expects revenues to follow trend growth rates on the back of a rebound in mobility which is close to the pre-COVID level. GUD has witnessed strong demand as it continues to remain above long-term averages. The company is not expecting any additional material government subsidies in H2FY21.

Focus on Driving Growth: With its balance sheet strength and funding in place, it continues to focus on the execution of its strategic plan and acquisition opportunities (in Automotive) to further drive growth.

Guidance: Meanwhile, GUD is estimating its underlying EBIT to remain between $95-100 million in FY21. Further, it is forecasting cash conversion of around 80-85% for FY21.

Key Risks

The company is exposed to the production and supply chain risks and high dependence on suppliers would lead to supply disruption and the potential impact on sales. It is also exposed to technology risks due to the emergence of new technologies and disruption in digital that would hurt its market and product segments. Besides, the company is exposed to  customer risks, reputation risks and adverse foreign currency movement risks. 

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

Technical Overview:

Weekly Chart –

Source: REFINITIV

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

The stock made a ‘Double Top’ at $13.69 and from there it has fallen to $11.28 and closed at $11.36 in the ongoing week. The technical indicator RSI with a reading around 42 and a flattish curve at the end, suggests neutral to flat momentum for the stock.

Going forward, the stock may have resistance around the 23.6% retracement level of $12.14 whereas support could be around the 50% retracement level of $10.41.

Stock Recommendation

We have applied EV/EBITDA based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a discount to EV/EBITDA Multiple (NTM) (Peer Average) considering the expectation of continuing freight logistics challenges as well as sustained COVID-19 related costs to linger in H2FY21 that would weigh on cost and margin. The stock has made a 52-week low and high of $10.190 and $13.690, respectively.

Considering the aforementioned factors along with its robust inventory levels to cater to the demand momentum, acquisition synergy benefits, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $11.360 per share on 14^th July 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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