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CONSISTENT EXECUTION POSITIONS BYD WELL TO OUTPERFORM DESPITE MACRO UNCERTAINTY
THE TD COWEN INSIGHT
Shares were up 4% yesterday, which we think reflects improved investor confidence from 1) the sequential recovery in underlying SSSG, and 2) strong margin improvement. More meaningful cost savings should start in Q2, which should position BYD well for reaching its 14% margin target by YE2026 and for valuation expansion irrespective of the timing of an eventual turnaround in claims volume.
Impact: NEUTRAL
Please refer to our quick take for key highlights and our thoughts on Q1/25.
Underlying SSSG was better than the headline. After adjusting for the impact of one less production day y/y, Q1/25 SSSG was -1.2% (vs. -2.8% reported), a meaningful improvement from -2.6% in Q4/24 and in line with management expectations. BYD continues to execute well on what they can control, focusing on improving the capture rate on claims volume. This allowed the company to continue to gain market share despite ongoing consumer weakness (due to elevated insurance premiums and economic uncertainty) pressuring demand. Thus far in early-Q2, BYD sees SSSG trending similarly to Q1. There is nothing incrementally negative about the operating environment, and management highlights early signs of positive industry trends (further moderation in insurance premium inflation, and rising used car pricing).
Strong margin improvement, with further expansion expected over the coming quarters.
Q1 gross margin expanded by an impressive 140bps y/y, or 40bps q/q driven largely by the internalization of scanning/calibration services (from 40% in Q4 to 60% in Q1). Looking ahead, BYD fully rolled out an indirect staffing model in early April, which is expected to result in ~$30mm annual run-rate cost savings. Over the rest of 2025 and into 2026, management looks to capture another $40mm in annual cost savings targeting both the gross margin and opex ratio, from improving indirect procurement (e.g., shop supplies/ equipment) and paint/parts/labour margins. Overall, management expressed confidence in achieving its adj. EBITDA margin target of 13% in the near-term (i.e., 2026), and 14% through 2029.
There is no change to our long-term positive outlook on the industry or business fundamentals. However, we did trim our 2025-2026 revenue and EBITDA estimates by ~4% to reflect more conservatism given the difficulty in predicting the timing of a return in consumer sentiment. We also introduced our 2027 revenue/EBITDA estimates of $3.76bln/ $508mm. Rolling out valuation another quarter, our target price falls to C$280 (from C $290).
