Description

tl;dr: cheap Polish compounder at sub 10x EPS, significant insider ownership, earnings currently depressed.

Inter Cars is the market leader in auto parts distribution in Central and Eastern Europe (CEE), and #2 in Europe behind LKQ. The company has been a steady performer for 20 years since its IPO in 2004, compounding EPS at 24% over the last 10 years in PLN, or 20% in US$ terms, and is currently growing sales at over 20% per annum. It’s cheap (9.8x TTM P/E), has high insider ownership, is run by the founder’s son and has a runway for continued growth. 

If you’re thinking that this closely rhymes with my writeup on Auto Partner (APR WA) from a year ago then you’re right, though the businesses differ slightly. There have been several writeups/blog posts on APR, but I can’t find any on CAR. Both stocks (along with a lot of Polish names) have done well but InterCars is still currently valued at just under 10x P/E and 7.8x EBITDA (TTM). Even allowing a discount for CEE exposure I think that’s too cheap for such a good business. The last couple of quarters have seen margins compress slightly, which some sell side have taken as an indicator of future margins. I think they’re wrong, it’s mostly due to high cost inventory from late 2022 (FX/shipping cost related), should have largely passed through now, and that margins will revert.

The Business

InterCars is the leading importer and distributor of automotive spare parts for passenger cars and commercial vehicles in CEE. InterCars has a wider product offering than competitors – including spares for commercial vehicles, marine, motorbikes, tires, selling Isuzu and Ford vehicles, manufacturing semi trailers, remanufacturing parts, offering repair services to fleet chains. 

The backbone of the business is logistics, optimizing parts flow from over 500 manufacturers to local end users (garages, shops, individual customers). The company has a central warehouse near Warsaw plus many regional ones, from which it supplies over 500 distribution centers. From here they service around 21 thousand registered end customers (service garages) with typically 4 daily deliveries of whatever parts are required for repairs. In addition, there is an association of Q-Service Castrol garages. Inter Cars also offers direct online parts ordering and service referral through their Motointegrator.pl site. 

Unlike Auto Partner, Inter Cars creates branches on a sort of franchise system, called “affiliate branches”. These are independent businesses, responsible for their own staffing, facility and buildings who provide the local distribution service. Inter Cars shares some costs, provide and manage the inventory and IT systems, and split the gross profits 50/50 (affiliate share shows up as “Costs of distribution service” on the income statement). Inter Cars gets capital light growth as they fold in smaller independent players, who see reduced investment in inventory, wider selection, faster delivery, benefit of a national brand, better IT systems and thus increased sales. It’s an efficient system that has allowed Inter Cars to grow rapidly.

Krzysiek Pietrzak.. became our franchisee in Warsaw. He wasn't too sure about the idea at first. He said: - My business is doing well, why should I change anything. And I said to him: - Krzysiu, first of all, you will free the money that you currently have frozen on the shelves, because from now on the warehouse will be fully financed by Inter Cars, and the goods will move automatically. You will not have to wonder what you are missing and where to get the funds to expand the assortment, we will provide you with the entire system. You will increase your turnover, and you will sleep soundly. And Krzysiek decided that it was worth getting into it.

Another network that Inter Cars has created and leveraged is the Q-Service Castrol network. This loyalty network is similar to (but larger than) Auto Partner’s “MaXserwis” network of service/repair shops. Inter Cars offers member service garages quick delivery of the widest range of high-quality parts and purchase discounts, a recognizable brand, complemented with specialist vehicle-repair and maintenance support and training, as well as with solutions, equipment and software for the operation of garages and work stands.

The company breaks out segment sales as below:

The company also makes most of its sales outside Poland now.

Growth drivers:

Mostly this is similar to the discussion for Auto Partners, and you should check out the charts in that writeup for context. Since 1989, Poland and the CEE have experienced economic growth, which has led to rapid growth in cars/capita. A lot of that demand has been filled by second hand cars from Western Europe, and thus a demand for spare parts and repair services outside the authorized OEM channels as many of the vehicles are well beyond the warranty (average age of the Polish fleet is over 14 years). 

As older cars are off warranty, this led to a growth of independent repairs shops, served by independent parts distributors. This market is rapidly consolidating as larger players like LKQ/Mekonomen, GPC, Inter Cars, Auto Partner etc expand through both greenfield and M&A. Smaller distributors can’t get the same purchasing discounts from suppliers, offer as comprehensive a parts catalog or an IT system for inventory and ordering, or compete with the delivery times of larger, denser networks. Different countries have different layers of distribution between manufacturer and service shop, but Inter Cars model and logistics system has steadily gained ground.

History

Pre-1989 most Polish cars were Eastern Block designs but there was a growing number of western models. Getting spares was difficult and entrepreneurs would import them – including Inter Cars founder Krzysztof Oleksowicz, who started by importing cars but moved to the spares business. 

Krzysztof Oleksowicz : I had an epiphany in 1984, when one day Harald (the owner of a workshop in Germany) and I went to Egon von Ruville's warehouse to buy parts. It was then that I met Klaus (the salesman Egon von Ruville), with whom I later collaborated. The scene went like this: Harald was buying parts for repairs at his workshop and half-jokingly, half-seriously asked Klaus why he was getting such a modest discount. " You know, Harald, you're just too small a customer for a big discount." - Klaus said, which sounded extremely comical, Harald was a huge, two-meter peasant. We all burst out laughing, but at the same time, an idea popped into my head. I asked Klaus:Listen Klaus, what discount would you give me if I wanted to buy some more parts to take to export to Poland?”

Klaus was completely stunned, because he did not expect such a "request for quotation". But he took it quite seriously and went to ask his boss what the company could offer me. The boss asked Klaus: – “Do we have any customers in Poland at all? " - "NO. This one would be the first," Klaus replied. "Then give him the maximum discount."

And that was the day I bought new parts for the first time to sell them later. To this day, I remember that they were Glyco bearing shells for Mercedes - the OM 615 engine, in the three most sought after sizes. 

After the fall of the Berlin wall, the spare parts market grew rapidly and Inter Cars ended up as by far the largest player, with over 30% of the Polish market:

• 1990 - Inter Cars established in 1990 by Krzysztof Oleksowicz (whose son Maciej is now CEO), Piotr Oleksowicz and Andrzej Oliszewski (still Chairman).

• 1998 Inter Cars launched the Q-Service garage chain in 1998. This association of independent automotive garages was a first, giving the garages benefits of Inter Cars’ technology, marketing, discounts etc and providing a larger customer base for Inter Cars.

• 2000 - first International expansion (Ukraine) followed, and has continued since with the company now selling in 19 countries, using both local branch affiliates in some territories and in other countries selling directly to customers (mostly via MotoIntegrator site, below).

• 26th May 2004 the company IPO’d on the Warsaw Stock Exchange, giving it valuable access to growth capital. 

• July 2007 Inter Cars S.A. announced a merger with JC Auto S.A. a specialist in Japanese parts, expanding their product line and consolidating their market lead. 

• 2012 the Motointegrator.pl internet portal was launched, allowing customers to directly order spare parts and referring them to affiliated garages for purchase of repair services if desired. 

In a distribution business, size matters and Inter Cars aggressively outgrew its competition. Better access to capital (through the IPO), better access to supplier discounts through purchase volumes, more distribution points through its affiliate branch network and the largest parts catalogue as well as being a leader in building a network of service garages through Q-Service to lock in customers all helped Inter Cars to dominate in its home market (over 30% market share), and latterly through most of CEE.

Management

The CEO, Maciej Oleksowicz has been in charge since 2017. He has been a member of the supervisory board since 2001. He’s worked on several IT implementations as well as starting and running a sub division, and starting other auto related businesses. He is the son of the founder Krzysztof Oleksowicz.

CFO: Piotr Zamora. Ex Deloitte and KPMG, Joined Inter Cars in 2008, CFO since 2013.

Chairman: Andrzej Oliszewski, co-founder. Chairman since 2004

Ownership

Senior management still have significant Insider Ownership (as of August 2023)

• OK Automotive Investments B.V. ( entity that is controlled by Maciej Oleksowicz, CEO) 26.30%.​ 

• Andrzej Oliszewski (co-founder, Chairman) 9.02%

Note: You’ll note that the sharecount doesn’t change over time. No big option grants that I can find, which is a pleasant change.

Market & Competition

The European aftermarkets parts distribution business is highly fragmented with the top eight players accounting for only 25% of the market, while the top three players have a combined 17% share, with consolidation continuing apace. 

The largest are 

#1 LKQ - Euro Car Parts, Fource, RHIAG Group, Elit, Auto Kelly, and STAHLGRUBER Group, as well as recycling specialist, Atracco. LKQ also holds a minority interest in Mekonomen Group. 

#2 Inter Cars 

#3 GPC (through Alliance Automotive Group (AAG)) 

This dated graphic from BCG/Wolk based on 2019 numbers gives a rough idea of market share:

Note: Mobivia is a conglomerate, primarily a service chain as well as providing parts distribution, and is now actually a client of LKQ.

International Strategy:

Outside Poland Inter Cars has a mix of strategies: in their core markets, they primarily have a rapidly growing network of affiliate branches served by a network of 17 warehouses (6 outside Poland), but beyond those markets they also make direct sales from Poland to foreign customers via the MotoIntegrator site. These sales are the fastest growing segment, and in Q1 increased by more than 40%. 

Historically the company has used this channel as a way of determining which markets to expand into next, though the CEO has indicated that the company will be more focused on consolidating their position and opening branches in existing markets for now. 

Auto Partner, by contrast, serves almost all of its foreign sales from Poland (they have a Czech warehouse too). This allows them to arbitrage some country list price differences from suppliers, something that may be a limiting factor long term.

Financial History

The dip in EBITDA margins from 2014-19 was linked to rapid expansion and an overemphasis on growth. Starting in late 2018, with the new CEO, the company began to emphasize profitability more and pulled back on new branch openings in mature markets (eg: Poland). The following slide is from a deck in 2019 and emphasizes the changes starting in q3 2018:

While margins have increased steadily over the last couple of years, the most recent two quarters have seen a dip in both gross margins and EBITDA (also with direct comp Auto Partner). 

• Sale of inventory purchased in H2 2022, when the PLN fell quickly and transport costs were high, now being sold during a period of PLN appreciation against the EUR/$, coupled with a significant decline in freight rates. Inter Cars holds less than 6 months inventory, so we should be nearly done.

• Inflation in wages and investment in expansion as the main drivers of growing operating expenses. The company continues to invest in automation to drive efficiency, so this should be blunted.

• Higher interest rates affecting finance costs. 

The company expects the margin pressure to be temporary, and as noted above, I tend to agree.

Valuation:

Comparables from Tikr:

Given the growth in the business, which is primarily organic (LKQ and GPC have been doing a lot of M&A in Europe), tailwinds from fleet age and CEE focus, I expect Inter Cars to be able to continue to grow in the mid to low teens for the next few years – HSD branch growth, some SSS, increasing contribution from direct sales into non-branch markets, some growth from non-distribution businesses. I think EBITDA margins settle back to the mid 8% range as FX and shipping rates and inflation are passed through and investments in automation and improved logistics pay off (LKQ Europe is in the 12% range and Auto Partner at 11%). I don’t model any M&A, just debt paydown.

So what could it be worth? Running it out 5 years, a 13x EPS terminal multiple/8x EBITDA, I get a PV of ~PLN 1,000/share at a 10% discount rate. Or alternatively, a low 20% CAGR in value in PLN. 

So why is this cheap

Apart from the usual concerns with a Polish stock – the Ukraine war & Russia, investing in an unfamiliar country/language/currency, there’s the recent concern over margin compression in Q1 & Q2 of 2023, as discussed above. I’ve read sell side notes which seem to think that margins are on the way back to 2018 levels, ignoring the changes under the new CEO which have led to significant improvements, and the temporary FX/shipping cost issues which affected the margins. The fact that the company called its shot back in 2018/19 on margin improvement (see slide above), that investments in efficiencies are ongoing and that the PLN and shipping rates have reverted gives me comfort on LT margins being more like 2022.

In addition the space in general suffers from concerns about future cars being electric and having less drivetrain parts and fully automated driving reducing crashes. I think these fears are overblown for a couple of reasons 

• The time when the majority of cars are electric, or self driving, is many years away yet.

• The time when it affects the fleet of 10+ year old cars (Inter Cars market) is even further away. Today’s new cars are still overwhelmingly ICE, and they are 2038’s 15 year old cars. 

• Electric cars and infrastructure will still need spares, which Inter Cars will supply

• In the interim, Inter Cars will have taken more share of the still very fragmented distribution market, will be able to address needs of electric cars and will be positioned to service other mobility repair markets too

Risks

• Volatile earnings: While sales growth has been steady, the margin improvements have been lumpy, tied to periodic investments in growth depressing margins. I think the CAGR of EPS will continue to be healthy, but probably lumpy

• Competition: LKQ, GPC, and the PE backed players listed above all are expanding in Europe, often via M&A. End users will no doubt attempt to play one off against the other on pricing. That said, this is still a fragmented market and rapid consolidation should lead to more rational behavior. In addition, competition is still largely market by market, as local delivery selection and times matter. Inter Car’s leadership position in most of the CEE puts it in a good place, and their growth is now focused on consolidating that regional lead. I see Inter Cars benefiting from M&A, either by being able to consolidate smaller players or being a target for LKQ/GPC.

• OEMs: OEMs have been looking to increase their share of aftermarket. For firms like Inter Cars, this is likely less of a threat since their market is very much the older, off-warranty vehicles where independent shops using cheaper parts can offer better value to consumers.

• Electric vehicles: See above. 

• Ukraine war expands further, affecting Poland/CEE disproportionately

Resources:

https://m-ri.intercars.com.pl/en/ The company posts English language reports here, but with a lag.

https://web-assets.bcg.com/36/39/e80d073a4067bfe89c7482d6db69/the-european-aftermarket-in-2030.pdf

https://www.mckinsey.com/~/media/mckinsey/industries/automotive%20and%20assembly/our%20insights/the%20changing%20aftermarket%20game%20and%20how%20automotive%20suppliers%20can%20benefit%20from%20arising%20opportunities/the-changing-aftermarket-game.pdf

https://m-ri.intercars.com.pl/files/regulacje/prospekt_emisyjny/prospectus_inter_cars.pdf

Catalyst

• Lagged pass through of FX and inflationary costs as high cost 2022 inventory is sold off

• Further penetration in markets outside Poland

• Increased direct sales to markets outside the core

• Further consolidation of the space, LKQ/GPC bid on Inter Cars?