Description

Auto Partner SA

Auto Partner SA is a Polish auto parts distributor. It’s a fast-growing number 2 in the Polish auto parts market. It has good ROIC, trades at less than 10x P/E, significant insider ownership and lots of profitable growth and investment opportunities ahead. I don’t have any immediate catalysts but even if you think Polish stocks should be cheap given macro risks, you stand to get mid-teens returns from compounding.

Business

Auto Partner is a distributor of spare parts for cars, light commercial vehicles, and motorcycles in Poland and internationally. It was founded in 1993 by Aleksander Górecki (still in charge, and together with his wife Katarzyna Górecka a 47% shareholder). Auto Partner is headquartered in Bierun, Poland. It listed on the Warsaw exchange in June 2016. Here’s one of their videos showing their distribution warehouse: https://www.youtube.com/watch?v=17NEssWhp2k&ab_channel=AutoPartner

The Company provides:

• spare parts for various car systems - electrical , exhaust , suspension and braking etc for European, Japanese and Korean cars

• motorcycle and scooter parts and accessories

• car filters (oil, fuel and air)

• car oils and chemicals

• car accessories

• Workshop software and equipment

• Loyalty network of repair shops (MaXserwis) which offers discounts, branding training, software and leasing to members

The Company’s customers are repair shops and stores.

“Other” is retail and non-specialized repair shops, so that workshops overall are about 70% of sales.

Auto Partner is able to service a wide network of local customers with just-in-time deliveries (3-5x daily) from 115 branches in Poland, supplied from a network of warehouses (one in the Czech republic, two in Poland with a third scheduled to open). Over 60% of orders are received online. It has nearly 10% share in domestic Polish market share for auto spare parts. Sales are roughly 50% Poland, 50% International (which is the rest of Europe, selling in over 30 countries but with only ~0.6% of sales to Ukraine, Russia or Belarus). International sales have been the fastest growing segment.

Servicing these repair shops is about having a wide selection and rapid service delivery – similar to the value proposition of any industrial supply wholesaler. Auto Partner has one of the most comprehensive networks of local supply depots, allowing for a very quick turnaround for parts ordered by local shops, and with over 250,000 SKUs can supply pretty much any part required bar tires and body panels. In addition to network density and quicker response times, scale brings purchasing power, efficiency of delivery routes, ability to hold a longer tail of SKUs etc.

Top 10 suppliers are about 40% of product, and Auto Partner has a growing private label business as well.

Private label brands (21% of total sales). Auto Partner's leading private label brand is MaXgear (established in 2006, 17% of sales) which includes over 35,000 types of spare parts in all product lines and the brand is present in the global TecDoc database. Other owned brands include: Quaro, (brake system parts), Rooks (workshop equipment), and Rymec (drivetrain). Product quality is backed up by the complaint rate, which is comparable to leading brands. Given the superior margins and lower cost to customers, Auto Partner continues to drive growth of its private label and exclusive distribution brands.

MaXserwis

Auto Partner operates a loyalty network of partner repair shops called Maxserwis. They do not own the shops themselves, but offer a known brand to member shops, provide training, expertise, sell workshop software, lease equipment and offer discounts to members. Currently, the MaXserwis chain comprises more than 350 repair shops.

Market

The Polish and central European auto repair markets are centered around small independent repair shops, with retail/DIY a smaller proportion compared to North America.

Market share by distribution channels of automotive spare parts: 

Source: Inter Cars

The average age of the Polish fleet is about 13 years and 92.6% of the cars are over 3 years old (per MEKO), making them targets for independent repair shops.

Drivers of growth for the repair market as a whole include the increasing car ownership of the Polish and Central European populations, increasing miles driven, aging of the fleet and increased complexity of cars requiring repairs forcing more drivers to use a repair shop.

Cars per 1000 population in Poland, per Statista

Partly this has been fuelled by sustained Polish economic growth over the last 30 years:

Another factor affecting the demand for aftermarket parts in CEE and Poland in particular has been massive imports of used cars, especially since joining the EU. In 2004-2019, more than 13 million used cars were imported. EU regulations have prevented the Polish government from restricting imports from fellow EU members.

Poland has the EU’s highest proportion of passenger cars older than 20 years – 36.5% according to Eurostat data from 2018. In 2020, the average age of car imports to Poland stood at 11 years and 11 months.

Poles still prefer to buy cheaper “tested” cars, rather than new ones, says Wojciech Drzewiecki, CEO of SAMAR, a Polish automotive consultancy. Twice as many used cars were imported in 2019 as new ones sold, reports Rzeczpospolita.

As a growing number of European countries set up programmes to support purchases of new lower-emission car models, the older ones travel east. “These cars are being pushed out of western markets and rather than being scrapped, they find buyers here,” says Drzewiecki.

Such was the case with diesel engines, which after an initial surge in popularity in the 1990s fell out of favour  following revelations that Volkswagen had cheated on its emissions testing. Since then, many European cities have committed themselves to phasing out older diesel engines. As a result, Polish imports of used diesel-powered cars have picked up in recent years, reaching 42.1% of used car imports in September.

As the economy contracts it is likely that there will be more demand for even older cars, according to Drzewiecki. “The older cars will have worse parameters.”

(Excerpted from: https://notesfrompoland.com/2020/10/09/polish-imports-of-used-cars-rebound-after-pandemic-and-ahead-of-anticipated-tax-rise/)

This has led to Poland having one of the oldest fleets, and means a very healthy growth in the demand for spare parts, which should persist as the Polish fleet is largely out of OEM warranty, and thus in the sweet spot for the independent aftermarket, which is projected to continue.

https://www.prnewswire.com/news-releases/automotive-parts-market-in-poland-to-record-usd-8-51-bn-growth--7-58-cagr-projection-through-2026--17-000-technavio-reports-301449870.html

Competition:

The Polish aftermarket parts distribution business is fragmented with one large player and several comparably sized mid-tier players, of whom Auto Partner is the largest (though I have not found a formal ranking by market share). Historically, the market has been characterized by price competition. Most of the bigger players operate a franchise network similar to Auto Partner’s MaxSerwis offering, and several also have private label offerings and pursue international growth. Some are part of national and international purchasing groups (Auto Partner is part of the Global One network). OEM car manufacturers’ network of workshops have a decent share of the market, but tend to lose work to independents as cars come off warranty due to lower costs of the independents.

Some useful industry information is available at https://www.motofaktor.pl/ and https://motofocus.pl/.

A few names and notes below:

• Inter Cars Second largest parts distributor in Europe, largest in CEE, by far the largest in Poland. https://m-ri.intercars.com.pl/en/stock-and-financial-information/presentations/. Removing tire sales and truck business sales are 3.5x Auto Partner in Poland. IPO’d in Warsaw May 2004 which has helped to fund the rapid growth into international markets all over Europe and adjacent business areas such as manufacturing of vehicles and trailers, real estate, logistics and vehicle sales. Still 35% insider owned. Runs a couple of networks of workshops– Q-Service and MotoIntegrator.

• HM Gordon / AD Polska – Established 1991, currently has 150 branches in Poland with nationwide coverage. 2021 rebranded as AD Polska part of AD International (previously part of GroupAuto Polska). https://www-gordon-com-pl.translate.goog/hm-gordon-przystepuje-do-ad?_x_tr_sl=auto&_x_tr_tl=en&_x_tr_hl=en&_x_tr_pto=wapp

• Inter-Team (owned by MEKO AB (formerly Mekonomen), whose largest shareholder is LKQ). https://meko.com/en/our-companies/. Has 85 branches nationwide and a subsidiary in the Czech Republic, 70/30 domestic to international split. Two workshop concepts, O.K. Serwis network and Inter Data Service. Own brands including Kraft and Sakura. MEKO’s 2021 annual report claims a 4% market share in Poland.

• Moto-Profil https://moto-profil.pl/en/company. 3 warehouses, distributes through a network of 1,400 wholesale partners, no direct sales to garages. As with others, offers “various training courses, the latest software and other information channels” to its ProfiAuto Serwis network, and its own brand parts through the ProfiPower brand.

• ELIT (owned by MEKO AB’s largest shareholder, LKQ Corporation, and confusingly, was formerly AD Polska),

• Alliance Automotive Group / GroupAuto Polska – controlled by Genuine Parts Company (GPC). Groupauto was established in 1999 as a platform for joint purchasing and marketing strategy and is developing its service networks: Eurowarsztat (currently 200 in Poland) and Top Truck.

• Motogama (Nexus Group) https://www.motogama.pl/

•  IAG Group – recently set up by several former Inter Cars employees

Why does Auto Partner win?

• Scale matters – to leverage overhead, get supplier discounts and logistics efficiency, develop valuable private label options and to lower funding costs. Smaller players, without access to public markets and lower cost capital have been late to invest in private label and international expansion.
• Aggressive Expansion: Auto Partner and Inter Cars have been growing much faster than their peers that I have been able to find data on - for example, Inter-Team grew about 5% 2018-2021, vs Auto Partner doubling total revenues and nearly 60% in Poland.
• CEE/Polish market focus: Peers such as ELIT, Inter Team and GroupAuto Polska appear to have had distractions with takeovers from foreign players. Despite MEKO tripling the EBIT margins of Inter-Team since 2018, they are still half the margins of Auto Partner (5% vs 10% in 2021) and its revenue growth has been lower.

Financials, and Valuation (data in millions of PLN)

The bump in profit margins and returns in 2020 is due to the company taking price increases (plus some vendor rebates). The increasing shift towards international sales also affects margins (lower gross, higher net margins). The company is currently trading at less than 9x trailing P/E, and about 7x EV/EBITDA. While total debt has increased, leverage is manageable and has come down from about 3.5x net debt/EBITDA in 2014 to about 1.3x in 2021. It pays a dividend (0.1 PLN/share in 2021, proposed 0.15 for 2022) but may grow as the company matures.

Revenue & profit drivers

Combining 5-10% annual branch growth, with an assumed 5% same store sales growth should give ~ 10-15% domestic growth. Cutting international sales growth in half to 25% would give just under 20% growth in total revenues, about where this year is tracking.  I do not include any projections for entrance into new geographies or adjacent markets such as tires, trucks & buses etc (which Inter Cars operates in), though all of these are realistic opportunities.

I would expect EBITDA margins to come down somewhat with cost inflation and competition, and revenue growth to slow. Capex needs are low given that real estate is leased, but working capital will continue to be a use of cash. If we take EBITDA margins down to 10% (from 11.7%) and assume revenue growth falls to 10% over 4 years, using cash flows to pay down debt, I have the company at over PLN2 of EPS in 2025. At about 8.5x EBITDA and 14x P/E on 2025, and discounting back at 10%, I think PLN20 is a reasonable target today.

I don’t expect it, but there is a chance of acquisition by one of the major players. M&A comparables, MEKO paid 9.7x EV/EBITDA when it took over FTZ (Danish) and Inter-Team in 2018. LKQ paid 10.6x for Rhiag (parent of ELIT) in 2015. GPC paid 10x EBITDA for Alliance Automotive Group in 2017.

Comparables:

I exclude Oponeo and Delticom as they are tires and rims. AZO & AAP are not great comps either.

Risks:

• Ukraine war. Auto Partner has little direct exposure to Ukraine (0.5%), Russia (0.1%) or Belarus, but higher gas prices hurt the consumer, and drive up both parts and logistics costs.

• Polish Economy: A deep recession in Poland and/or CEE states will affect repair spend (though perhaps will hit the new car market worse).

• Rising Interest Rates: The company has variable rate loans. Higher interest rates may slow expansion (though I suspect it will hit smaller players worse).

• Currency risk: The Company doesn’t currently hedge so a fall in the Zloty will pressure margins

• Increased/Irrational competition from larger players: MEKO, LKQ and GPC are already present in Poland and Auto Partner has competed successfully with them all over the last several years and MEKO specifically call out Poland as being price competitive already. Further consolidation would be good for the market

• Market Headwinds: Poland’s cars/capita ratio is no longer one of the lowest in Europe and over time the fleet may get younger as GDP/capita rises. Offsetting this, de-aging is likely to affect the junkiest part of the fleet (20 years+), leaving plenty in the 5-15 year range for the independent aftermarket. In addition, more disposable income may drive more spend on vehicle upkeep.

• Electric Vehicles: EVs require less drivetrain maintenance. Poland’s EV fleet is tiny but fast growing and in late 2021 the government rolled out subsidies for EV leasing, in a bid to reduce emissions. Near term this shouldn’t affect the independent aftermarket since it should mostly displace new ICE purchases. We expect Auto Partner to develop products for the EV market, while continuing to take overall share in off-warranty market in the CEE, where we expect the fleet should continue to grow.

Additional Reading:

• English language IR site: https://ir.autopartner.com/en/materials-for-investors/

• Santander coverage (appears to be discontinued): https://www.santander.pl/inwestor/analizy-i-rekomendacje/program-wsparcia-pokrycia-analitycznego-gpw/auto-partner

• Some other writeups on the company:

• Sohra Peak Capital Partners: https://mcusercontent.com/3fff1ea9d792aab7f6dffe0ab/files/ccc97c91-fc8f-09c6-53f2-0e9109d1cb71/Auto_Partner_SA_Condensed_Thesis_August_2022.pdf

• Galician Investor https://galicianinvestor.substack.com/p/auto-partner

• Mexican Investor https://mexicaninvestor.substack.com/p/auto-partner-mexican-investor-120?r=wm9oz&s=w&utm_campaign=post&utm_medium=web

Catalyst

Continued expansion of branch network / international expansion

Polish economy & European gas prices stabilize