• Auto spare parts stock Supply Network to lift on robust market demand
  • BNPL stock Zip could be an attractive takeover target, says broker

 

Robust demand for Supply Network

Broker Ord Minnett has put out a Buy recommendation for commercial auto spare parts company, Supply Network (ASX:SNL), with a target price of $15.40 (vs current price of $14.30).

Last week, SNL provided a trading guidance for FY23, with sales expected to increase by 26% in FY23 to $250m. Bottom line underlying NPAT is also expected to increase 33% to $26.5m.

The company says there is strong demand from commercial vehicle customers for parts, driven by industry tailwinds such as an ageing vehicle fleet, increasing freight task, and the increasing complexity of vehicles.

As such, management expects that growth “will remain above the long-term trend for at least the next year”.

SNL also said it was bringing forward capacity-related investments, which include the doubling of capacity at its new Victorian Distribution Centre and branch at Truganina in Victoria, as well as the planned opening of a new branch in Yatala, Southeast Queensland.

Ord Minnett likes SNL because the company has a solid track record of earnings growth, coupled with high returns on invested capital.

“The commercial vehicle automotive aftermarket industry is fragmented, and we believe there is scope for further market share gains and consolidation,” said the broker.

“We see a meaningful opportunity for expansion in SNL’s operations. We expect sales to continue to grow at above-average levels.”

According to Ord Minnett, this growth will be driven by demand for bus and truck parts in the commercial automotive aftermarket, as well as further expansion of the SNL branch network in Australia and New Zealand.

 

Zip could be a good takeover target

Shaw and Partners has a Buy recommendation on BNPL stock, Zip (ASX:ZIP), with a 12-month price target of $2.02 (vs current price of $0.51).

There have been recent changes to BNPL credit legislation in Australia, and there is now clarity on what specific regulations would be applied to the industry.

Now read: New laws finally bring clarity to the BNPL sector – here’s how the market reacted

Financial Services Minister Stephen Jones announced last month that services offered by BNPL providers will be treated as a credit product, which means that companies will now have to determine whether their products are suitable for current users, as well as conduct an affordability test for new customers.

Under the proposed legislation, there will be a cap on late fees charged for missed payments, and BNPL providers will have to offer hardship provisions to struggling customers.

Shaw believes these new regulations will positively benefit Zip as the group would have minimal changes to undertake, and that the new rules will only serve to formalise standards that Zip already complies with.

“Broadly, we suspect that there is ~30-50% upside medium term to Zip’s Australia and NZ volumes if and when the legislation is implemented,” said the broker’s note.

In particular, Shaw believes these changes would benefit Zip by levelling the origination playing field, seeing that other competitors have not been complying with those standards.

According to Shaw, the regulation will also soften competition for Zip as competitors are expected to cease their operations in the ANZ.

Shaw also believes Zip is ripe for a takeover play, and the company’s current value appears to be attractive for potential acquirers.

“Afterpay (Block) should have a crack at Zip,” said the broker.

 

Share prices today:

 

 

At Stockhead we tell it like it is. While Zip Co is a Stockhead advertiser, it did not sponsor this article.

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