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-Brokers generally set lower target prices after cutting forecasts
-Deteriorating new vehicle sales weigh
-Less capital management potential, says Ord Minnett
By
Last week GUD Holdings ((GUD)) downgraded its FY22 earnings guidance to
Following April's reassurance, five brokers that are updated daily in the FNArena database for the company all had Buy (or equivalent) ratings and an average 12-month target price of
Of the five brokers, only Citi has decided to downgrade its rating to Neutral from Buy to reflect increased uncertainty surrounding the projected earnings recovery, which remains largely reliant on the normalising supply from original equipment manufacturers (OEM). It's thought this may take longer than expected, plus it also is outside of the company's control.
Citi downgraded its 12-month target price to
The company's Automotive segment represents the vast majority of earnings and distributes spare parts under brands such as Ryco, Wesfil and Narva. Water products are sold primarily under the Davey brand.
In recent times, management has been on the acquisition trail and purchased
However,
While Citi points out a deterioration in new vehicle sales since April has adversely impacted earnings from the
Other reasons for the earnings downgrade
Wilsons, not one of the seven brokers updated daily in the FNArena database, understands the rising risk posed to
The magnitude of the earnings downgrade suggests to the analyst other factors at play apart from a decline in market volumes. It's believed a recent loss of market share by
After an initial review following the earnings downgrade, Macquarie retains its Outperform rating and
Management noted much of the earnings downgrade relates to delayed vehicle deliveries due to supply chain challenges and Credit Suisse is adamant there are no internal problems which led to this outcome, other than timing issues.
Despite holding this view, the broker doesn't rule out potential for a negative share market overreaction given
On the other hand,
Ord Minnett feels there may be less near-term capital management alternatives, given the increased levels of gearing incurred as a result of the
Citi agrees the balance sheet could take longer to de-gear as inventory will be higher for longer because of Chinese lockdowns.
The Outlook
Nonetheless, the broker sees risks for those segments of the business exposed to new vehicles, given the challenging consumer backdrop and the strong correlation between new car sales and property values.
Credit Suisse looks forward to a potential catalyst for a share price re-rate in early August, when the company holds its FY22 earnings call with an update on the OEM production status.
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