Bapcor (ASX: BAP) expects to report fiscal 2025 underlying net profit of about AUD 82 million, 14% below last year, as operating performance deteriorated over the second half.

This excludes about AUD 49 million in one-off costs, mostly impairments and asset write-downs. Shares initially closed 28% lower on the news.

We lower our fiscal 2025 net profit forecast by 19% to AUD 82 million. Revenue declined across all segments except trade. But even the historically resilient trade business weakened as the second half progressed. Sales growth in trade was probably negative by the end of the half.

Bapcor’s turnaround is taking longer than we expected, and cost-outs appear to be weighing on sales more than expected. These headwinds look set to persist into 2026, and we also lower our fiscal 2026 net profit forecast by 18% to AUD 98 million.

Questions about capital allocation, past earnings

Historical earnings also appear not as strong as previously reported.

The company intends to reduce opening retained earnings by about AUD 24 million after an audit of the last three to four years. We think this suggests future earnings power is likely weaker, and we have lowered our midcycle forecasts.

We cut our Fair Value estimate for Bapcor by 18% to AUD 6. The downgrade principally reflects a more protracted turnaround, and lower forecast midcycle earnings, down 14% to AUD 150 million in fiscal 2029. Prior earnings, hence the baseline, appear overstated.

We downgrade our Morningstar Capital Allocation Rating to Standard, from Exemplary. The lack of cohesion among acquisitions in specialist wholesale, where we think Bapcor lacks competitive advantage, has come home to roost. New CEO Angus McKay is targeting a reduction in segment complexity and duplication.

Shares screen as undervalued

Shares are materially undervalued. We expect near-term disruptions to operating conditions and weakness in discretionary retail to be transitory. Longer-term, we expect demand for auto spare parts, the bulk of narrow moat Bapcor’s earnings, to remain resilient.

Much of the near-term trading headwinds are self-inflicted. A shift in promotional strategy hurts sales, but supports gross margins. Cost-outs, like branch and distribution center consolidation in specialist wholesale networks, have been disruptive to sales in the short term.

While painful, we think these steps were probably necessary as new management targets a turnaround. McKay is trying to simplify the business, remove costs, and focus on the competitive advantages in trade that underpin Bapcor’s narrow economic moat.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.