ARB’s brand and reputation for high quality aftermarket vehicle parts have the long term earnings trajectory on a steady uphill climb.
SUV sales still dominate. Australians continue their fascination with the (proper) SUV. Newer models are finding the sweet spot of being more family friendly (higher safety ratings) at the same time as being the standard work vehicle for many, not just tradies. The SUV segment continues to account for every other new vehicle sold in Australia, although it is questionable if some smaller SUVs are just pumped-up small cars (compact SUVs). The serious SUV segment is where ARB focuses its aftermarket products from bull bars to rear bars and every accessory in between. Used vehicles remain an important target market for ARB’s products.
New models, long wait. The long awaited release of Toyota’s Landcruiser 300 has coincided with perhaps the longest wait list for delivery experienced in this country at well over two years. Ford’s new Ranger (and its cousin, the VW Amarok) is facing similar hyper-demand not being met by supply. Anecdotal evidence suggests the supply issue is affecting the whole industry. For ARB, this simply delays revenues and creates a backlog of work.
Exports growing. ARB’s products and reputation are helping to increase export sales, now over 38% of total sales. The North American market is particularly promising given the relatively new agreement with Ford USA and a recently announced commercial agreement with Toyota North America.
Manufacturers getting onboard. ARB also has an agreement with Ford Australia to supply offroad accessories through Ford dealerships, backed by Ford’s new vehicle warranty. The deal applies to the new Ranger and Everest models and as these have been slow to reach customers, the impacts of the deal are yet to be seen. Regardless, it puts ARB inside the manufacturer’s tent, and we would not be surprised to see others copy the move.
Investment View
ARB has comfortably survived the disruption of the pandemic but is still being held back by the slow delivery of new vehicle orders. Nonetheless, Australian aftermarket sales increased 9% in FY22, strongly outperforming new vehicle sales growth of -2.1%.
Freight and distribution costs are also on the increase, ahead of revenue growth for now, but are beginning to ease.
ARB has continued to grow its Australian retail network with 4 new stores taking the total to 74 (30 company owned).
ARB’s key point of difference in aftermarket accessories has been its investment in product development. This is why manufacturers are gravitating towards its offroad expertise to enhance the appeal of this category of vehicles.
Earnings could be constrained in early FY23 by the on-going new vehicle supply problems, but we expect this will gradually get better. This will unleash the backlog of demand for aftermarket products.
ARB’s balance sheet reflects its very conservative Board. The company has effectively grown without the use of any debt whatsoever for at least the last 12 years. The dividend payout ratio of 50% keeps accumulating retained earnings.
The share price performance in the last year had skipped ahead of fundamentals, so the pullback was not unexpected. Now at 22.6x FY23f consensus EPS, the share price is below its long term average multiple of 25x.
At current levels, there is still some uncertainty on near-term earnings, but the long term story remains one of big potential. Consumers continue to value the versatility of utes and large SUVs and this story remains fully intact despite the hoopla around the EV revolution.
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 upgraded our recommendation to Buy from Hold.
Figure 1: FCAI new vehicle sales - year to 31 August 2022
Figure 2: Australia new vehicle sales - moving annual total
