Putting the Pedal to the Metal
Four-wheel drive (4WD) accessory specialist, ARB Corporation (ASX:ARB) recently released its May trading update showing management putting the pedal to the metal for growth, with the company ramping up its capacity in Thailand and Keysborough, Victoria, while also devoting more branches to the domestic market to match growing demand. We also take a quick look at the First Half numbers.
Recap and What’s New?
In our last coverage of the stock back in December (FAT-AUS-851) we reviewed the company’s 2017 results ended 30 June 2017. The company exhibited another year of robust performance with all its categories posting year-on-year growth. This follows in the wake of an admirable long term sales growth track record, with a 10.1% compound annual growth rate over the past 10 years despite the impact of the Global Financial Crisis falling in that period.
That aside, the most notable development in our view is the development of the company’s export business which delivered 14.3% year-on-year growth and accounted for a sizable 27.6% of the total sales figure. This segment will likely accelerate even further as the company has a healthy pipeline of contracts with manufacturers while the international 4WD market is seeing growing demand.
Today, look at the company’s First Half 2018 Results covering 01 July 2017 to 31 December 2017 as well as the company’s latest trading update covering the 3Q18 period.
1H18 Results Review
Starting off with the headline figures and the company reported an improving market backdrop, seeing double digit growth in its main lines of business. This is summarised in the graphic below:
Source: ARB Corporation (ASX:ARB) 21 February 2018 Company Filing
Looking at individual categories and sales to the Australian Aftermarket segment grew at an accelerated 10% year-on-year pace compared with the previous corresponding period. This pace of growth is notable as this segment in recent history averaged the low single digits, thus we find this update a refreshing change of pace, highlighting the success of its ongoing expansion in what is already a developed market. According to management all states of Australia delivered growth with above average growth in New South Wales and Queensland.
Another factor we believe to be a stimulant for growth is its ongoing expansion of its store count. As of the 1H18 period, the company had 61 ARB stores in Australia having added 3 stores year-on-year, with 25 of the total being owned by the company. Going forward into the 2H18, the company has guided for at least 3 new stores becoming operational.
The Exports segment which services US, Europe, Thailand and the Middle East, saw a much faster pace of growth this time around with the US being particularly strong, buoyed by low unemployment and rising consumer confidence. Sales for this segment surged 20.2% year-on-year, however, the Australian dollar was strong against the US dollar in the 1H limiting the positive impact of even higher sales growth in the US.
Sales to Original Equipment Manufacturers (OEM’s) market managed to stage a recovery from last year’s slower pace, delivering 7.6% year-on-year growth in the 1H18 period. Management notes that this was mainly due to winning new contracts with OEM customers leading to higher orders booked for the period.
Going forward, management notes 2 key drivers for growth in the segment:
Firstis that stock availability crunches should be addressed which is why the company is seeking to scale up its manufacturing capacity in Thailand while also building up a new 20,000 sqm warehouse to increase storage capacity and shipping in larger quantities to economise freight costs. The company has also increased investment in inventory by $15 million, bringing the total to $106 million.
Second, the company is working on new contracts with OEM customers that should improve sales in this category by the end of the fiscal year and beyond.
Overall Sales for the period grew by a pleasing 12.4% year-on-year to $208 million.
Source: ARB Corporation (ASX:ARB) 21 February 2018 Company Filing
Moving on down to profitability and pre-tax profit for 1H18 was up 10.9% year-on-year to $35.75 million amidst a weaker US dollar (dragging Exports down), while booking an $800,000 one-off moving expense to new headquarters and the increased inventory investment. According to management, this was mainly due to the company maintaining its margins and prudent cost control.
The 1H18 period also involved substantial investment in infrastructure to meet the planned expansionary needs, which amounted to $26.6 million. This figure includes the $20 million investment in the new Keysborough warehouse. We believe that the investments involved were all internally funded as the company ended the period with no net debt.
Net Profit after Tax shows a flattish result, up only a marginal 0.4% to $23.45 million. The Board, in the filing, noted that they view the pre-tax result, which excludes the material impact of taxation for the interim period, as more accurately reflecting the operating performance. Adjusted for the under-provision of tax charges (another one-off) that reflected a faster 13.4% year-on-year growth.
May Trading Update
Following the interim results, the company provided a trading update in early May for its 3Q18 (covering January – March 2018) sales performance as well as management’s growth strategy for the remainder of FY18.
Sales in the 3Q18 continued to be robust delivering another double-digit round of growth, with sales up 12.4% year-on-year.
A breakdown shows that the Australian Aftermarket segment accelerated in this period, with sales up 11.3% year-on-year. Management noted that Tasmania joined New South Wales and Queensland with above average growth. Wholesale (Fleet) and Dealer sales performed well from a combination of the “Just Gotta Ask” marketing campaign and aggressive salesmanship.
Source: ARB Corporation (ASX:ARB) 02 May 2018 Company Presentation
The Exports segment saw a slightly slower (compared to 1H18) 16.3% year-on-year growth rate though all export operations achieved robust performance. Management highlighted the growing 4WD market across many parts of the world as a significant opportunity and they are following through with expanding Thai wholesale operations via signing up new distributors and increasing investments by established distributors as well as engaging new customers in the Middle East countries.
Finally, the OEM segment sales have accelerated from the 1H18, up 7.9% year-on-year as order books from the new OEM customers accelerate while factory throughput was increased to match. Management highlighted renewals and new contracts with OEMs as the main driver.
In light of this improving market, management has ramped up the ARB store expansion from 3 to 7 new stores by the end of the year. Again, management has opted not to provide any formal guidance though they did advise that its sales order book is currently strong both domestically and internationally.
Summary
ARB Corporation’s shares are currently trading at circa 31.8 times the consensus earnings estimate for FY18, with a prospective dividend yield of 1.7 percent. The next year the price to earnings multiple falls to 28.0 times and the yield increases to 2.0%. Though valuations might seem somewhat lofty, they are warranted, in our view, given the company’s impressive multi-year track record of sales and earnings growth, high return on equity and market leadership in an attractive segment of the automotive space. The company has generated significant wealth for shareholders over the long term and its prospects continue to look bright.
Accordingly, ARB Corporation will remain will firmly held in the Fat Prophets Portfolio.
