This morning, Atlas had a one-on-one call with Bapcor (BAP) management (interim CEO and CFO) following their truant new CEO and their third-quarter trading update, which clarified management strategy and timelines.

Key Points:

  • What happened?: In 25 years as an analyst and fund manager, I have never seen a CEO decline to turn up on his first day of work. I have seen executives fired on day for lying on their resumes and faking their way through the recruitment process (https://www.afr.com/companies/myer-fires-new-recruit-andrew-flanagan-over-fake-r%C3%A9sum%C3%A9-20140625-jgq7c) and https://money.cnn.com/2012/05/13/technology/yahoo-ceo-out/index.htm , but not change their mind about the job. Several times, we pressed director & now interim CEO Mark Bernhard about the failure of due diligence and what caused Paul Dumbrell to decline to show up, and the consistent answer was that the board received an email citing “personal reasons” and that they have had no contact with Paul since April 27th.
  • What Next?: The current Interim CEO, Mark Bernhard, will continue in his position over the coming months until a replacement is found. Atlas see that Mark is a very capable interim CEO, having held roles as CFO and Vice-President of Shanghai General Motors and Chairman and Managing Director of General Motors Holden, so strong experience in automotive logistics.
  • Retail (21% EBITDA) spending remains soft following consumers’ tightening spending due to higher interest rates, which has seen them forgo critical vehicle maintenance.
  • Trade & Specialist Wholesale (79% EBITDA) businesses still growing but are currently seeing margin compression due to higher margin items such as sound systems and bull bars being in less demand.
  • Cost Out Strategy ongoing: Pleasingly, Cost-saving measures or the “Better than Before” program introduced by the previous CEO will continue with a renewed focus on the most efficient areas rather than a broad range of cost-cutting across the business. Supply chain consolidation continues with successful warehouse consolidation in Queensland benefited from learning from the mistakes made in the Melbourne warehouse consolidation.

CEP Strategy:  The call with management did not change out investment thesis that over the medium to long term BAP will benefit from the ageing of the Australian vehicle fleet and that car parts and vehicle maintenance is non-discretionary spend for both business and consumers alike. However, with no short catalysts until after their full-year earnings in August, we will not be adding to the position which is currently at 2% of the portfolio on a PE of 14.5x with a 4.5% yield.