A New Long Idea: Auto Partner S.A.
It’s been a long time since I posted a new writeup, however, with markets declining recently I have begun to see more and more opportunities come up. One of the most interesting is Auto Partner S.A. (WSE: APR, APR.WA). I have more writeups planned for the near future, but I’ll save such a discussion for an update piece on this newsletter soon.
Auto Partner is a high quality low-cost provider and distributor of after-market and spare automobile parts in Poland and Europe. The company has consistently grown revenue every year at a CAGR of 23% and with profits growing at a CAGR of 42% since 2015. The company is the 2nd largest auto parts distributor in Poland with around 10% market share. Auto Partner is expanding and growing quickly in Western Europe with <1% market share. The company enjoys several competitive advantages and high barriers to competition. The company’s return on invested capital has exceeded 20% in the last few years while returns on equity have reached as high as 32%. Today the company trades at a TTM P/E of just 8 despite proven strong growth and returns on capital that I believe can continue. My base case has the company trading at 10X 2024 earnings by the end of 2024, resulting in 96% upside in 2 years or an IRR of 35%.
Business Overview
Auto Partner SA Group is a low-cost Polish distributor of spare and aftermarket automobile parts founded by current CEO, founder and 36% shareholder (inclusive of shares held by spouse) Aleksander Górecki in 1993. Górecki has grown the business from a single 200 square meter warehouse in Katowice to three warehouse/distribution centers across Poland and one in Prague (Czech Republic), in addition to more than 110 branch offices with total storage across all facilities and branches exceeding 100,000 square meters. The company generates around half of their revenue from inside Poland with the other half coming from various customers across 30 other European countries.
The business is relatively straight forward to understand, though the operational logistics of it all are rather complex (I will not begin to pretend to understand all the nuances here). Essentially, Auto Partner sources parts from OEM suppliers. These parts are transported to one of Auto Partner’s main 4 warehouses. From there, the parts are sorted and stored in an efficient manner. Parts are then distributed to branch offices on an as-needed basis. From branch offices, parts can be picked up or delivered, sometimes multiple times per day, to customers (mechanic shops).
Auto Partner’s main customers are auto mechanic repair shops making up 62% of Polish revenue in 2021. Retail stores make up around 27% of Polish revenue. The remaining 11% comes from the other category, which the company describes as retail customers (I assume this means D2C) and non-specialized repairers. Approximately 50% of the company’s revenue comes from domestic Polish sales, while the remaining 50% (growing faster) comes from the rest of Europe. The company does not disclose European revenue by customer type, however, the majority of this revenue is to auto parts middlemen that act in some ways like distributors. More on this below.
Auto Partner sources parts from over 350 different suppliers. The top 10 suppliers make up around 40% of Auto Partner’s total merchandise. The company gets volume-based discounts on parts from most suppliers, so the more they sell, the better gross margins generally become. Alternatively, Auto Partner could pass additional margin on to customers to keep prices low and maintain or grow marketshare. Auto Partner has also developed their own private label brand known as MaXgear, which now makes up around 21% of total sales. MaXgear now has over 35,000 products sold across Europe and is accretive to margins. Overall, products distributed by Auto Partner include engine parts, shocks, springs, filters, oils and chemicals, cooling and heating systems, electrical components, seals, exhaust systems, braking systems, drivetrain systems, belts and rollers, and more accessories.
Customers essentially want 3 things from Auto Partner (and other parts distributors). Fast delivery, large selection, and competitive pricing.
MOAT/Competitive Advantages
Auto Partner’s moat consists of high barriers to entry for new competitors as well as a durable business model and industry that will continue to exist for decades. Auto Partner has built competitive advantages in distribution & scale, technology, operations & management, and pricing.
Perhaps Auto Partners most significant barrier to entry is their existing (and growing) scale and distribution. Auto Partners has four main competitors in Poland, two of which are smaller, one of which is larger. (I recommend this piece by Jon Cukiewar for a more detailed discussion on Auto Partner’s competitors). Distribution is important as mechanic repair shops often want to be able to order and receive parts as quickly as possible. Ensuring the company is able to move parts quickly and efficiently and have parts on hand to reach customers is essential. Scale allows Auto Partner to negotiate better with suppliers, as well as find and deliver nearly any part at a fair price. Having scale allows Auto Partner to maintain their status as a low-cost provider while also earning adequate and even increasing margins and returns on capital.
It would obviously be very difficult for a brand new competitor to not only build out this distribution but also develop the relationships with suppliers, and then still have to convince repair shops to use them over Auto Partner or another distributor. Thus, scale and distribution are an extensive moat.
Auto Partner has invested in technology across the business. They have technology software for managing the warehouses that store hundreds of thousands of different parts, as well as technology for mechanic shops to put orders through quickly and efficiently online as opposed to the clunky old system of calling orders in every time a new part is needed. This reduces friction in the system and helps increase efficiency. The company has expressed a desire to be a technological leader in the industry and have so far shown to be highly competent in this area. Although some competitors may have similar technology, it is a necessary component of the business today and would take considerable time and effort for a new competitor to develop.
Auto Partner‘s management has focused on operational excellence and profitability. It is clear looking at the company’s financial statements that the business has focused on improving profitability through both revenue growth and margin expansion. I expect this will continue going forward.
All this ultimately leads to Auto Partner having the ability to offer customers the precise combination of fast delivery, selection, and pricing they need.
Market & TAM
The after-market and spare auto parts market is massive. Most sources suggest the auto parts market in Poland is several billion USD. In Western Europe the market is well into the hundreds of billions of USD ($250B+). This is obviously an order of magnitude larger than Auto Partner’s 500-600 million (converted to USD) of sales. Currently, Auto Partner claims to have around 10% domestic share of the Polish market, and a small fraction (well under 1%) of the European market.
Q1 2022 was the first quarter that Auto Partner achieved more revenue outside of Poland than inside. I expect the industry will continue to grow inside Poland with Auto Partner not only capturing new industry growth as vehicle adoption increases, but also continuing to increase market share over smaller sub-scale competitors. Outside of Poland, I expect Auto Partner will be able to gain market share as a low-cost provider, but with less of a tailwind from industry growth.
Growth Opportunities/Levers
The first and perhaps easiest growth lever for Auto Partner is the growth of their domestic business inside Poland. With 10% current market share and 110 branch offices Auto Partner has room to expand further inside Poland. My understanding is they’ll open 10-15 new branch offices per year. This is further evidenced by the fact that the other 3 Polish competitors have about 50% of the remaining market share, for a total of around 60% aggregate share among the top 4 competitors in Poland . This leaves the remaining 40% of the market for taking from sub-scale competitors. Given this is a business that benefits from scale, it seems likely these top 4 competitors continue to take market share. Should Auto Partner capture a quarter of this additional market share, their domestic market share would grow from 10 to 20%, doubling Polish sales.
The other main opportunity is in the rest of Europe. Currently, Auto Partner’s international revenue mainly comes from selling to middle-men auto parts shops in the rest of Europe rather than directly to mechanic shops. These auto part shops (which I assume are more like Auto Partner’s branch offices and/or like retailers) then sell directly to the repair shops. I had one investor tell me that Auto Partner’s international business has lower gross margins, but higher EBIT margins by about 3%. Thus, profit margins should improve as international revenue continues to grow faster than domestic revenue.
In the Jon Cukieware piece I linked above, Jon discusses several more avenues for growth including growth in other Eastern European countries where the model is the same as Poland (direct to Mechanic shops), expanding warehouses to Western Europe for faster and more efficient delivery, and the introduction of product categories the company has not yet carried, the largest (and logistically most difficult) of which being tires.
Investment Case and Financials
The investment case is quite simple. At 12 PLN per share you’re paying 7.6 times TTM EPS of 1.50 PLN. I’m forecasting earnings to increase slightly in 2022 over 2021, but decrease vs the trailing twelve month period as of the end of Q2 2022. This is due to high inflation increasing operating expenses as well as the lapping of COVID subsidies received in 2021. This has already been demonstrated in the first 6 months of this year where revenue has grown 27% but net income has only grown 10%, and where net income declined 6% YoY in Q2. Although I think Auto Partner will continue to see a drag on profits over the next couple of quarters, I expect this to normalize and see the company return to growth in 2023.
I’m forecasting 1.43 PLN of EPS in 2022, 1.74 PLN of EPS in 2023 and further growth to 2.24 PLN of EPS in 2024 on 20% annual revenue growth with very slight increases in margins. I believe these estimates are conservative. These estimates put the P/E at 6.6 times ’23 EPS or 5 times ’24 EPS. I could easily see this having a 10-15X multiple by 2024 if inflation calms down and the Ukraine-Russia conflicts subsides as this stock has traded at such a multiple in the past.
My base case has the stock trading for 10X my 2024 EPS estimate by the end of 2024. This would mean the stock would trade for 22.40 PLN, representing ~96% upside from today’s prices in about 27 months or an IRR of 35%. In a bull case, the stock could trade for 15X ’24 EPS, resulting a share price of $33.60 PLN, upside of ~194% or an IRR of 62%. My bear case would assume inflation in operating expenses eats up all incremental profit, however, I still see little downside as the stock already trades at a cheap multiple of current earnings and I don’t see revenue or earnings declining given business quality and momentum. Barring any extreme event such as Russia extending an invasion into NATO territory like Poland, I am hard-pressed to come up with a bear case for this stock that results in shareholders permanently losing money over a 2+ year time frame.
Potential Catalysts/Value Unlocks
Current issues leading to a low multiple for Auto Partner are structural as well as macro. I believe these have little to do with the underlying value of the business. First, the stock trading in Poland is a structural barrier for many western-focused investors. I personally use Interactive Brokers to access Polish markets. Despite this barrier, Poland has been considered a developed market since 2018 and continues to make progress toward similar standards of living as Western Europe. This should bring in more investors that are more comfortable with the country over time, increasing multiples in general. Second, the Ukraine-Russia conflict is a clear contributor given Poland shares its Eastern border with Ukraine and Russian-allied Belarus. A resolution in this conflict would likely bring more confidence back to Polish equities, increasing multiples across Polish markets.
Risks
Competition
Auto Partner is the 2nd largest auto parts distributor in Poland and claims to have around 10% of the domestic market in their investor presentation. Auto Partner’s largest competitor domestically is Inter Cars with around 30% market share. There are two smaller competitors in Poland known as Inter Team and H.M. Gordon, both of which have slightly smaller market share than Auto Partner. Domestic competition in Poland does not seem to be a great risk, although if this market ultimately becomes a race to be a single low cost scaled provider, then Inter Cars is ahead of Auto Partner in terms of scale (but not technologically or operationally) and could be the eventual winner. However, it seems unlikely this will ever be the case.
In the rest of Europe, Auto Partner faces more established competition. Nonetheless, being based in Poland has its advantages. Auto Partners is often able to offer more competitive pricing relative to their European counterparts despite not having scale in the rest of Europe, likely partially due to lower operating costs. This, however, comes at the cost of longer delivery times since Auto Partner’s distribution is not yet scaled in these other countries. Customers may choose to pay more for faster delivery from another provider, at least until Auto Partner can match delivery times. This dynamic could flip however once Auto Partner is established in more European countries as Auto Partner may have higher costs that no longer allow them to offer the lowest cost parts. They will then have to rely on their barriers to entry for continued success.
Electrification
The electrification of transportation is a risk for a couple of reasons. First, electric vehicles tend to require less maintenance and fewer repairs overall than internal combustion engine vehicles. This is obviously not ideal for a company that makes money selling more auto parts. Second, electric vehicle parts may disrupt traditional part manufacturers requiring Auto Partner to develop new supplier relationships. It is my understanding from discussions with other shareholders that Auto Partner has already begun establishing relationships with electric vehicle part manufacturers. Furthermore, electric vehicles lack the engine parts, but still require things like brakes, suspension, interior parts, cooling and heating systems, and electrical systems.
Poland – Inflation, new developing market, currency risk, etc.
Poland is not without risks. The inflation rate in Poland, although stable at under 5% for the last 20 or so years, has seen a sharp increase recently to around 15%. This is not particularly surprising given recent global inflationary events. Obviously, this spike is not unique to Poland, but it is a larger percentage than most developed nations are currently experiencing. This could lead to increased operating costs as workers demand compensation in line with inflation, as well as an impact on every other cost to run the business. Auto Partner will need to keep costs under control to maintain their status as a low cost distributor. Ultimately Auto Partner should be able to absorb cost increases better than non-scaled providers, perhaps leading to an increase in market share as small sub-scale companies struggle to compete. Also, Auto Partner should be able to pass on many costs to repair shops, who then pass it on to end consumers. I believe this has already been demonstrated with the acceleration of revenue growth in the last couple of quarters.
Another risk here is currency risk. Auto Partner trades on the Warsaw exchange denominated in Zloty (PLN). The Polish currency has devalued relative to the USD by about 50% over the last 5 years from around $0.30 USD to $0.20 USD. Should this continue, investors may see gains in the stock price wiped out once converted back to USD. Investors may want to consider hedging the currency risk.
Conclusion
Auto Partner is a competitively advantaged business with a strong moat and excellent returns on capital trading at what I think is a bargain price. The company seems to be trading at a low multiple due mostly to factors outside its control and not related to the operational success of the business. A slight multiple increase from 8X to 10X along with profitability growth once macro factors are resolved would result in considerable gains for shareholders from current prices. Further multiple expansion may be possible as the business increases in size and attracts more western institutional investment. Even if, however, the multiple does not expand, the business should be able to use its competitive advantages to continue growing profits at a good rate.
I have not yet purchased a position in Auto Partner as of the time of posting this writeup, however, I plan to purchase shares in the near future.
Disclosure: I’m long XPEL, SMTI, LEAT, PBIT.CN / POSAF, GLXZ, LMN.SW, and APR.WA.
Disclaimer: This post and all Uncommon Profit posts are not financial advice in any way and should not be taken as such. All articles, including this one, and all information within Uncommon Profits is for educational and informational purposes only. I receive no direct compensation from any company covered. I will profit in the event the share price of these companies increases. Although I make an effort to update readers when possible, I may choose to buy or sell at any time with no obligation to update or notify readers. Consult a professional financial advisor before making any investment decisions.
Thumbnail Image courtesy of Aaron Burden