Today, we are doing a different exercise from what we are accustomed to. It’s not an investment thesis on Inter Cars, but rather its analysis has helped us better understand the automotive aftermarket sector, which was previously discussed in the investment thesis competition held this March, featuring the company AutoPartner.
First, we have a look at the industry, looking for its main challenges and opportunities, then we delve into Inter Cars and finally we compare it with Autopartner and some other players in the industry
Industry overview
The independent aftermarket (IAM) industry has an anti-cyclical component that generally works well in any economic environment but especially in times of economic downturns. When, due to a crisis, the sale of new vehicles decreases, this causes an increase in the age of the vehicle fleet, resulting in the need for more maintenance.
The main factors driving the market are the size of the car fleet , the age of cars and the miles driven.In general, a car becomes a target for the industry at the end of its guarantee period.
The industry is undergoing several trends that will bring changes , some positive and some negative.
Challenges :
Electrification: The electric car will bring changes in the, but it will take longer than it might appear to have a real impact on the aftermarket. BEVs have around 30 percent lower aftermarket replacement part revenue potential than ICE vehicles. We will use a report by Roland Berger in conjunction with CLEPA to get an idea of the impact.
Before discussing the report, we have to understand that a new car does not become a regular customer of the independent aftermarket until the end of the warranty, a car sold today will not be a potential customer until 2028.
The report presents 3 scenarios a 2040:
- Regulatory compliance: Share of electric cars in the total fleet, 42 % and of the traditional aftermarket ,13%.
- Contraction Ambitious transformations Share of electric cars in the total fleet, 52 % and contraction of the traditional aftermarket ,16%.
- Radical Electrification: Share of electric cars in the total fleet, 54 % and contraction of the traditional aftermarket ,17%.
Excluding additional demand for new components exclusive to electric cars nt, in the most optimistic scenario for the electric car, the independent aftermarket would fall by less than 17% in 2040.
In our opinion the electrification of the fleet will not be so simple. These scenarios consider that the 2035 regulatory target will be met. We do not see this leap as easy, especially in the less developed regions where the company operates, where sales of electric cars are much lower. We see the high price of electric cars and the lack of charging infrastructure as obstacles. For example, charging a Tesla at a Tesla Supercharger will take about 30 minutes.
Another challenge that could affect the sector in the long term would be that with the advancement of safety technology, fewer accidents will be seen.
The positive trends:
On the other hand, companies in the industry are more optimistic and expect a higher price for new components to offset the drop in volume. They will also have new opportunities in remanufacturing electrical components. These positive trends are:
An increase of the fleet in Western Europe of 0.8% by 2025 and 0.4% by 2030, in central Europe of 1.7% by 2025 and 1.2% by 2030 and in eastern Europe of 1.3% by 2025 and 1.2% by 2030.
An aging fleet with a current average age of 12 years, where in Eastern and Central Europe the age is even higher.
For all these reasons, the market is expected to grow by 4 to 5 % annually until 2025 and by 1 to 2 % until 2030 according to BGC or 3 % CAGR until 2030 according to McKinsey.
Another point in favor of the larger companies is the fragmented nature of the market, as shown in the following table with an estimated share of the European market. There are several sources of information on market size that vary slightly . According to Global MarKet Insights the market size in 2021 was 168 B USD ( approx 160 b €) and by Graphical Research 166 B USD (165 B €). For the market size estimates , the average exchange rates of 2022 have been used in our analysis.
Source : Inter Cars Q 3 2021 presentation and Annual Reports of the Companys.
According to these estimates the top 4 only have 14.4 % of the IAM market while in the USA according to Mckinsey since 2015 already the TOP 4 already accounted for 50 % of the market. The rest of the companies operating in Europe are unlisted companies, smaller in size and losing market share. In an industry in which scale is critical, this trend towards consolidation will continue. This consolidation has taken place mainly through M&A.The entry of companies such as LKQ, GPC or private equities such as Bain Capital former owner of PHE which was acquired by D`leteren Group in 2022, are driving the market to consolidation.GPC through its subsidiary Alliance Automotive Group did 9 acquisitions in the last two years. LKQ since 2011 has done more than 80 acquisitions in Europe, the latest being Uni-Select, a Canadian company that also operates in the UK.
We don’t have much data on the prices paid for the acquisitions as most of them are small and unlisted companies. We do know that PHE was acquired with considerable debt for 0.7 EV/SALES and 7 EV/EBITDA while Uni-Select was acquired for 1.2 EV/SALES and 13 EV/EBITDA.