Investor sentiment towards ARB Corporation (ASX:ARB) is split. On the one hand, all divisions are seeing improved sales momentum. On the other hand, profit is constrained by an unhedged foreign exchange exposure. This is due to the significant depreciation in the Australia Dollar relative to the Thai Baht and lower factory recoveries. In addition, expansion into the high-growth US market is still in its early stages.
We recently researched ARB in The Dynamic Investor to assess whether current levels present an entry opportunity.
About ARB Corporation
ARB Corporation designs, manufactures and distributes the largest range of accessories for four-wheel drive (4WD) utilities, 4WD Sport Utilities (SUVs) and light commercial vehicles in Australia. The Company has manufacturing plants in Australia and Thailand, with sales, warehousing and fitting facilities across Australia.
ARB has operations across three division: i) Australian Aftermarket (the largest contributor to sales), ii) The rapidly-growing export market and iii) Original Equipment Manufacturers (OEM). Sales of new 4WD utilities and SUVs are a key driver of demand for ARB’s products.
In the Australian aftermarket, the Company distributes through its ARB store network, to retail customers, ARB stockists, new vehicle dealers and fleet operators. There are currently 77 total stores in Australia, of which 47 are ARB-branded stores and 30 are Company-owned stores.
Key Fundamental Drivers
Improvement Expected for Australian Aftermarket Division
The Australian Aftermarket division reported flat sales growth in FY25. This was a strong result considering key new vehicle sales were down -12% and consumer discretionary spending was constrained. In addition, revenue contribution from recent acquisitions disguised a material degree of cyclicality in a weaker new vehicle market.
The Australian Aftermarket division is expected to return to growth in FY26, supported by: i) Improving volumes of ARB’s top vehicles, ii) A price increase (+2.6%) introduced early in 1H26, iii) The release of the Ford Super Duty which is expected to be a strong seller in the Retail & Fleet channels, iv) A healthy order book and v) A continued focus on fitting performance and team retention, with ARB actively recruiting for fitters in all states, and continuing its program to employ skilled migrant workers.
Notably, new vehicle sales have shown some signs of improving in recent months and the prospect of further RBA interest rate cuts could stimulate new vehicle demand. According to the Federal Chamber of Automotive Industries, new vehicle sales increased 5.1% in September 2025. Vehicle sales have increased for four consecutive months after declining for ten consecutive months, cycling record sales from FY24. Importantly, for ARB, sales of its key vehicles increased by 7.0% in August 2025 (up from -1% in 4Q25, and -2% in 3Q25).
Margins Under Pressure
Gross Profit Margin (GPM) declined 130 basis points (bps) to 56.7%, with GPM in 2H25 declining by -400 bps to 54.2%. This was due to Cost of Goods Sold increasing in 2H25 as a result of a weaker A$ (relative to the Thai Baht (THB)), cost inflation and limited price increases.
Lower GPM is expected in FY26/27, coupled with higher Depreciation & Amortisation charges are likely to offset the benefit from higher sales. In terms of whether pricing and/or operating cost benefits can act as an offset to lower GPM, we note:
1. The +2.6% price increase implemented in August 2025 likely represents a minimal revenue tailwind for the Australian Aftermarket division (i.e. <1%). Firstly, the price increase applies largely to fitment (as opposed to ARB historically implementing price increases for products as well as fitment fees). ARB’s decision to leave product prices largely unchanged may imply some competitive pressures through a softer demand environment given ARB’s premium price position.
2. ARB has invested ahead of growth, adding headcount, expanding its product range, improving its market positioning, increasing its store network and adding to its eCommerce and distribution efforts. This investment has resulted in a step-change in operating costs and impacted Profit Before Tax (PBT) margin, which fell by down ~240 basis points to 18.0% in FY25 (19.4% in 1H25) and is also below the medium-term target of ~20%.
Strong Balance Sheet – Scope for Further Acquisitions & Capital Management
FY25 represented a strong year for cash conversion (100%), which aided in lifting the cash balance to $69m as at 30 June 2025. The strong growth in cash was achieved notwithstanding dividend payments and investments into long-term strategic initiatives in the US. ARB has no debt.
The payment of a 50 cents per share special dividend (in addition to a final dividend of 35cps) reinforces balance sheet strength and management’s confidence in the outlook.
The strong balance sheet position provides scope for the Company to consider further strategic acquisition opportunities focused on product and distribution expansion. In addition, ARB is sufficiently well capitalised to continue to return capital to shareholders.
Fundamental View
ARB shares are currently trading on a 1-year forward P/E multiple of ~30x, which is above the average multiple of ~28x over the last five years.
The stock is therefore not cheap anymore in light of:
i) An EPS growth profile of +12% over FY25-28 on a CAGR basis,
ii) The downside risk to GPM from further currency weakness, expectations for pre-tax profit margin to decline further in FY26 and
iii) The still-minimal contribution to group profit from 4WP & ORW – with a meaningful contribution remaining a medium-to-long term proposition.
Charting View
ARB put in a large bottoming pattern across April – August. It broke above a major resistance level in mid-August and rallied hard to about $41. It is now consolidating as it prepares for another move higher. If it can break above $40 then that could lead to another rally.
Michael Gable is managing director of Fairmont Equities.
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