Proper utes and wagons make up approximately 17% of Australia’s new car sales or nearly 200k vehicles each year. Australia steadfastly continues to buy more, new (and used) 4WDs and wagons, and upgrading them to cope with offroad conditions. ARB specialises in this ‘conversion’ therapy for vehicles and is expanding its product breadth and depth.
After a year or two of long wait times for delivery of new vehicles, owners of the army of new Hilux’s, Rangers, Tritons, Landcruisers and D-Max’s (among others) is queueing up at ARB stores to take their vehicles the extra step to offroad braggadocio. It is true, the new Landcruiser 300 will easily cross the Simpson desert unmodified, but sensible owners will take the necessary precautions by fitting all manner of ARB equipment before doing such a trip.
And now, ARB is making the offroad experience even more tempting with the addition of a fully capable offroad camper trailer, aptly named the ‘Earth Camper’. The RV market in Australia is worth about $3bn in annual sales, so ARB is stepping into very competitive territory. But the Earth Camper is a high-quality, top-end unit that will sell the base model around $75k when it hits the market in September this year. Apart from being heavily decked out with existing ARB equipment, buyers will inevitably be spending additional money on the towing vehicle to match the hardiness of the luxury pod on the towball.
ARB’s gross profit dollars will begin to go much higher than the typical bull bar priced around $3-5k. Depending on how successful the camper is, we would expect ARB’s group gross margin to rise. The product is so new it has barely had an opportunity to make an impact on the market. But with ARB’s nationwide store network and its broadly respected brand, it could eventually move the earnings dial.
The camper is engineered for global markets including North America. First Australian deliveries are expected by Q4 of FY24.
ARB’s earnings are coming off the pandemic peak where it earned more in FY21-22 pre-tax profit than it did in the prior four years. To backfill the earnings profile, ARB has expanded its engagement with Ford and Toyota and extended its reach into the USA with the first of its new stores now open. There have been other initiatives such as the Truckman acquisition in the UK now sporting the ARB brand. The company now has distribution points in 125 countries complementing the 74 Australian stores. The collaboration with Ford is particularly interesting as it enables customers to buy and fit ARB equipment at the Ford dealership and have it covered under the new car warranty.
Peer company GUD reported a strong automotive result this week noting a resilient market for repairs and maintenance plus solid demand for aftermarket parts.
Our own channel checks reveal a decent demand profile in Australia with workshop waiting times still hovering around the 4-6 week mark for fitment of parts.
Figure 1: Top 10 model sales in Australia 2022
Figure 2: New vehicle sales - Year to June 2023
Investment View
Toyota, Ford and other major manufacturers have clearly not abandoned the diesel and petrol powered off-road capable vehicle market that is so iconic in Australia. New models keep appearing in the market, admittedly many with hybrid power units, but the basic model still speaks to a big market of tradies, adventurous families and mining companies or fleet buyers who need rugged, practical vehicles. ARB’s business has been a core part of this industry since Arthur Ronald Brown founded the company in 1975.
In our view, ARB’s extension into fully kitted out camper trailers is logical but does carry some risk given the depth of competition. ARB’s reputation will attract plenty of interest and while it is too early to know if it will succeed, we sense it has a great chance.
At 25x FY24 PER, ARB is not particularly cheap, but it has such a niche in the offroad industry it can carry a premium. The multiple has halved from peak levels and is now around its long term average. We think conservative market earnings forecasts are likely to be upgraded when ARB reports its FY23 result on 22 August.
We have lifted our recommendation to Buy in anticipation of a stronger earnings profile.
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 changed our recommendation from Hold to Buy.
