ARB has pre-released its basic figures for 1H23 result. Sales revenue has slowed from the elevated pandemic levels bringing net profit back to earth. But the company remains is good shape even as consumers face a period of belt-tightening while interest rates go up.
Revenue in 1H23 declined 5.1% compared to last year. The positive takeaway was that Australian aftermarket sales, ARB’s largest business, grew by 2.7%. Export sales fell 8.8% while OEM sales fell 36.9%, as indicated at the November AGM.
Profit before tax will be between $64-64.6m, down 29.7% on last year reflecting higher costs due to inflation and a dip in sales. Cost pressures have moderated with freight and steel prices both easing, while some price increases will also contribute. The customer order book remains in line with the strong 2022 levels.
The most recent Federal Chamber of Automotive Industries (FCAI) data for new vehicle sales in Australia showed growth across all categories. In particular, we note that the Ford Ranger and the Toyota Hilux accounted for 10.5% of all new vehicles sold in Australia during January 2023. The evergreen Toyota Landcruiser Prado is also due for a big update this year to which devotees will flock to like flies on a snag. Anecdotally, the long tail of undelivered vehicles is easing up quickly and global supply chains improve.
Investment View
ARB probably does not care if you drive an EV or a diesel-powered Landcruiser. Any vehicle driving around Australia’s vast patchwork of unsealed roads needs ARB’s comprehensive range of high quality off-road aftermarket accessories – bull bars, canopies, roof racks, driving lights, snorkels, vehicle electrics (battery systems), recovery gear and so on. The company designs and manufactures its own products and distributes equipment on behalf of other suppliers such as Thule, Old Man Emu (suspension) and Redarc (electronics).
Sales of full size 4x4 SUVs have barely faltered throughout the pandemic so that ARB’s target market is still growing. Indeed, the introduction of the new Ford Ranger has only heightened the competition with multiple manufacturers vying for market share in a sector where the vehicle use spans from daily work horse to family getaway platform.
The more recent agreement with Ford Australia has yet to gain traction, but as more vehicles hit the roads, we expect this to feature in future earnings for ARB. The agreement is to supply aftermarket accessories through Ford Australia dealerships which are backed by Ford’s new vehicle warranty. We think other manufacturers may seek to copy this as it puts ARB inside the manufacturer’s tent with the warranty a key advantage for customers seeking aftermarket gear.
We speculate that the Government’s small business tax office instant investment write-off scheme could potentially be scrapped in the May Budget. The scheme which allowed small business owners to spend up to $100,000 and instantly write down the investment in its accounts would have been used extensively for vehicle purchases. This may put some pressure on new vehicles sales but as much of ARB’s market is exposed to used vehicles, the impact may be limited. Higher fuel prices may also stem the enthusiasm to travel long distances for domestic holidays, but again this has not deterred adventurous motorists in the past.
ARB’s growth path is not limited to its successful formula in Australia. The company’s conservatism has served it well for many years with a debt-free balance sheet for the last 12 years and a modest 50% payout ratio. ARB has fashioned agreements with Ford USA and Toyota North America that could open doors to greater distribution of its products. Closer to home, we have long speculated that an acquisition of Redarc Electronics would be a perfect fit for ARB, but the relationship remains commercially separate for now. We focus on Redarc mainly for its clear expertise in vehicle electronics that will undoubtedly merge seamlessly with the EV sector.
ARB’s share price has rebounded from its end of 2022 low point which now has it trading on a FY23f PE ratio of 26x, roughly in line with its pre-COVID average. Consensus earnings forecasts for FY23 are anticipating a softer year with anticipation of growth beyond.
Risks To Investment View
The advance of electric vehicles, and the regulatory policies that may penalise ICEs, could eventually restrict the target market for ARB’s products. Demand for SUVs could fall if economic conditions worsen or if government policy places barriers in front of the traditional vehicle market.
Recommendation
We have reduced our recommendation from Buy to Hold.
Figure 1: PE ratio averaging 26x
Figure 2: Share price anticipating EPS decline
