RESEARCH NOTE GUD Holdings NEUTRAL

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Emil Gordon
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1 1 RESEARCH NOTE GUD Holdings NEUTRAL Price: A$12.97 Price Target: A$12.61 ASX: GUD 2 February 2018 GUD Holdings (GUD) delivered 1H18 earnings of A30.2 cents per share, +15.7% over the previous corresponding period (pcp). Key headline movements versus pcp included: Group revenue up +11.0%, EBIT up +12.0%, underlying operating earnings (EBITDA) increasing +13.0% and the interim dividend climbing +14.0%. GUD has divested Oates in January 2018 (their second largest business unit) and acquired bolt-on businesses for their Automotive segment. Management flagged their ambition to actively assess further potential acquisitions in the automotive industry, confirming a full pipeline for the Company s largest segment (Automotive). Management is targeting full year profits at the lower end of the guidance range at $ m. GUD has become an easier business to understand, with the divestment of two of its non-core businesses proving to be highly successful. GUD currently trades on a one year forward PE-multiple of 17.8x and a yield of 3.9% - Neutral. 1H18 key results summary. GUD reported strong results, with the divestment of the Oates segment (in Jan 2018) bearing no significant impact on the Company s operations. (1) GUD posted a 1H18 underlying NPAT of $25.8m (up +16.0% pcp); (2) while revenue from continuing operations rose +11.0% to $195.0m driven by double-digit growth in Automotive and robust contribution from Davey, (re-stated FY17 numbers restates Dexion and Oates segments as discontinued operations). (3) Underlying basic EPS was at A30.2cps (vs. A26.1cps in the pcp). (4) EBIT from continuing operations was up +12.0% to $39.9m, which was inclusive of ~$0.2m of

2 2 significant items relating to acquisition transaction costs. (5) A fully franked interim dividend of 24cps was announced, an increase of 14.0% from last year s level. Portfolio Repositioning (in Automotive). GUD has been reshuffling parts of their portfolio considerably in the past year; most notably divesting their Oates segment at the end of From 2015, other successful sell-offs have included Sunbeam, Lock Focus, and Dexion, while acquisitions over the same period were made in businesses Brown & Watson, Griffiths Equipment, IM Group, and AA Gaskets. Management have achieved $164.0m of proceeds by means of M&A activity alongside $75.0m through capital raising to be applied to the Automotive segment, bolstering the unit s core business operations while selling-off auxiliary services. The Company notes that they continue to seek and actively assess further potential acquisitions in the automotive industry due to its inherent attractiveness and our [their] core strengths related to this industry. New Zealand continues to grow (for Davey). Davey reported a +2.0% rise in sales for the half, mostly attributable to sustained growth in New Zealand and further customer gains in Australia. Management flagged their focus on controlling cost in Davey, having considerably cut down on product expenses which consequently led to an EBITDA uplift of +18.0% for the segment. GUD expects improved sales for Davey in the second half as a result of continual cost improvements and channel expansion. Portfolio-shuffle lowers guidance estimates. Management revised their profit outlook towards the lower end of their $ m guidance range that was given at the October AGM. The Company now expects underlying EBIT for the full year to be ~$90.0m, which will be inclusive of only seven months contribution from AA Gaskets, and six months from Oates (performance before it was divested). Further, an after-tax profit contribution of ~47.0m will come from the Oates sell-off. Our valuation A$ We arrive at our price target of A$12.61 using two valuation methodologies: DCF (A$12.48), and PE-relative (A$12.75). Our relative valuation includes trading multiples from the following peer group ARB, AMA, APE, BAP, SUL.

3 FIGURE 1: SPLIT OF REVENUE BY SEGMENT FIGURE 2: SPLIT OF EBIT BY SEGMENT Investment Thesis We rate GUD as a Neutral for the following reasons: GUD trades on a FY19

3 3 FIGURE 1: SPLIT OF REVENUE BY SEGMENT FIGURE 2: SPLIT OF EBIT BY SEGMENT Investment Thesis We rate GUD as a Neutral for the following reasons: GUD trades on a FY19 PE-multiple of 17.8x and FY20 of 16.7x, and current dividend yield of 3.9%. Attractive exposure to the automotive after parts segment, which is expected to grow at 8-10% per annum.

4 4 Divestments of struggling business units could see a rerating to a higher multiple as GUD s earnings profile become less volatile. Organic growth to be supplemented with acquisition growth with management noting a full pipeline of acquisitions in FY18. Key Risks We see the following key risks to our investment thesis: Earnings surprise on the downside in the Automotive aftermarket sales. Earnings surprise on the downside in Davey. Market share loss to competitors. High competitive pressures leading to the inability to push through price increases. Lower than expected consumer spending. Unfavourable currency movements (lower AUD relative to USD) resulting in lower input costs. Company Description GUD Holdings (GUD) consists of two segments: 1) Automotive: comprises leading aftermarket brands in Narva and Projecta (from the recent July 2015 acquisition of Brown and Watson International) as well as Ryco, Wesfil and Goss. The range includes automotive filtration products, oil, engine air, cabin air, fuel and transmission filters, and fuel pumps. Narva is a leader in lighting and electrical accessories while Projecta focuses on battery maintenance and power products market. 2) Davey: provides a range of water-related products such as water conservative and water treatment products, domestic and commercial swimming pool products and spa bath and spa pool pumps with applications in domestic, farm and community markets.

5 1H18 results summary FIGURE 3: 1H18 GROUP RESULTS Automotive segment continues to be the main driver for Group. Revenue was up +11.0% to $194.7m, largely driven by +14.

5 5 1H18 results summary FIGURE 3: 1H18 GROUP RESULTS Automotive segment continues to be the main driver for Group. Revenue was up +11.0% to $194.7m, largely driven by +14.0% jump in Automotive sales (consisting of 8.0% organic growth), alongside slight contribution from Davey which saw +2.0% growth. Reported basic EPS increased +16.0% to A30.2cps versus A26.1 pcp. The interim dividend was up +14.0% at A24cps (fully franked), compared to A21cps pcp. M&A activity over the year. The Company declared the divestment of the Oates unit to Freudenberg Household Products in January 2018, the second largest segment at the time of the sell-off. Divestment proceeds of $80.0m were redirected towards net debt reduction, and the move is expected to contribute ~$47.0m after tax profit on sale to the Company s 2H18 results. GUD also acquired AA Gasket Group to strengthen its Automotive portfolio in November of Balance sheet. Net debt at the half was at $194.0m, equating to 1.3x annualized EBITDA. This sits slightly lower than the ratio of x that the Company had guided towards previously, but the reductions comes about largely from the Oates proceeds that went to reduce debt. On the analyst call, it was evident that GUD was positioning itself for further acquisitions.

6 By Segments Automotive (EBIT up +12.0%; 91.6% of total EBIT). The Automotive segment saw sales growth of +14.0%, comprising +8.

0%, in which GUD attributes to the early contribution of their add-on businesses.

FIGURE 4: AUTOMOTIVE SEGMENT RESULTS Threat of the electric car?

6 6 By Segments Automotive (EBIT up +12.0%; 91.6% of total EBIT). The Automotive segment saw sales growth of +14.0%, comprising +8.0% organic growth on top of acquired businesses growth. There was robust EBIT growth of +12.0%, and a slight reduction in margins from 29.0% to 28.0%, in which GUD attributes to the early contribution of their add-on businesses. Management sees improvement here in the second half, with 1H18 only experiencing 1 months of contribution from AA Gaskets. FIGURE 4: AUTOMOTIVE SEGMENT RESULTS Threat of the electric car? On the analyst call with management, GUD addressed the threat of the rise of the electric vehicle towards the Automotive segment and the demand side of the business. While management recognized the undeniable trend towards these types of vehicles, they pointed towards the majority of passenger and SUV vehicles that were petrol or diesel powered. GUD sees a prolonged market, while electric and hybrid vehicles only consist of 1.0% of the population share. FIGURE 5: VEHICLE NUMBERS BY FUEL TYPE

7 Davey (EBIT up +9.0%; 8.4% of total EBIT). Davey saw a slight increase to margins at 9.0% (versus 8.0% pcp), largely due to management efforts to improve its cost base.

7 7 Davey (EBIT up +9.0%; 8.4% of total EBIT). Davey saw a slight increase to margins at 9.0% (versus 8.0% pcp), largely due to management efforts to improve its cost base. While sales only increased by +2.0%, EBIT was up +9.0%, again due to GUD s cost reduction endeavors. Management consequently sees an improved second half for the unit. FIGURE 6: DAVEY SEGMENT RESULTS FIGURE 7: GUD COMPS TABLE

8 8 FIGURE 8: GUD FINANCIAL SUMMARY

9 9 Disclaimer/Disclosure This document is provided by Vested Equities Pty Ltd (ABN ; AFSL ) ( Vested ). The material in this document may contain general advice while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor s objectives, financial situation and needs. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Vested nor its associates make any recommendation or warranty concerning the accuracy, or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and Vested is not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate. Vested and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Vested does, and seeks to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Vested. We disclose that Vested Equities Pty Ltd, it's directors and advisers have investments in this company. Before investing, you must consider the Prospectus, including the risks that are outlined in that document, before applying for any shares under the IPO offer. To apply for shares you must complete the online Application Form that accompanies the Prospectus. The above dates are indicative only and are subject to change. The Company reserves the right to vary the dates and times of the Offer, including extending the Offer or accept late Applications, without notifying any recipient of this Prospectus or any Applicants. Applicants are encouraged to submit their Applications and payment as early as possible.

GUD Holdings Limited Results for half year ended 31 December 2017

GUD Holdings Limited Results for half year ended 31 December 2017 Jonathan Ling Managing Director Result key points Reported NPAT increased 61% to $28.4 m from $17.7 m previously Discontinued operations