ARB Corporation (ASX:ARB) provided a trading update for the 1st quarter of FY25 (1Q25) at their AGM on 17 October. The update disappointed the market, as sales growth was lower than consensus expectations and increased costs negatively impacting profit. The underwhelming 1Q25 result continued the recent slide in the share price. Accordingly, we recently researched the Company in The Dynamic Investor to assess the outlook.
About ARB Corporation
ARB Corporation designs, manufactures and distributes the largest range of accessories for four-wheel drive (4WD) 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. Distribution capacity is being built out in the US to support the Export segment and generate outright sales in the US.
The Company has operations across three segments: 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.
Key Fundamental Drivers
Australian Aftermarket Faces Slowdown
For FY24, sales for the Australian Aftermarket segment grew by +5.4% with particularly strong sales in fleet and dealer channels. However, there are signs pointing towards more muted underlying growth in FY25. This is due to dealers & fleet outperforming retail, increasing promotional activity, less price growth and moderating 4WD sales. Notwithstanding, we highlight several offsetting factors. These include: i) A strong order book, ii) Improved workshop efficiencies and fitting capacity, iii) New store development and iv) New product releases
Further, the Ford Licensed Accessories (FLA) program sales and order intake continue to trend positively supported by increasing program dealership engagement. Both Ford and ARB are looking at opportunities to expand the collaboration and are currently in negotiation to extend the current contract for five years. ARB’s products have been added to Ford’s finance program with further 10 new products going through approval.
US Opportunities Drive Growth in Export Segment
The Export segment disappointed in FY24, with sales down 6.5%. Sales experienced slight growth in 2H24. However, weakness through Asian markets, low consumer confidence and weak new vehicle sales impacted revenue.
Within the Export segment, the key area of investor focus is the US, which is a key growth market. In FY24, the Americas sales decreased -6.5%, with the 2H24 returning to growth +2% after a softer 1st half performance. The Company expects growth across all US channels in FY25.
ARB’s first US retail store is on track to open in 2Q25, with planned expansion of its Texas distribution centre in 1H25 and leasing a small distribution centre in Los Angeles to support eCommerce sales. The upsize (and addition) of distribution centres in the US is also complemented by investment in a US-based Research & Development (R&D) in order to support localised new product development. Regarding the latter, new projects typically have a 2-year to 4-year development cycle. ARB has a record number of projects for OEMs in Australia and overseas.
Pleasingly, overall trading conditions have improved in early FY25. The Company also reported an increased in the Export order book in 1Q25. In addition, trading conditions in the UK and NZ markets have improved. Further sales growth in the US is expected as a result of contracts with Toyota USA (including 4Runner Trailhunter volumes), with additional contracts with Toyota USA expected to be announced during FY25.
Improved Margin Performance Expected
The Company reported Profit Before Tax (PBT) margin of 20.6% in FY24, which was ahead of the 18.1% reported in FY23. However, PBT margin softened in 2H24 due to ongoing cost inflation pressures. PBT margin is likely to benefit from a price increase implemented on 1 October 2024.
While the quantum of the price increase is comparatively small, it should help negate some pressure on Cost of Goods Sold and operating costs; and return PBT margins back to the 20-21% level. Having said that, higher costs associated with business growth and transaction-related costs present a risk to PBT margin recovery in the short term.
Fundamental View
ARB retains strong fundamentals, with further expansion of its Australian Aftermarket network, a strong pipeline of new products, accelerating export sales and a developing platform for long-term sustainable growth in the US. These factors are reflected in an attractive EPS growth profile of +10% over FY24-27 on a CAGR basis. In addition, a strong balance sheet position provides scope for ARB to consider further strategic acquisition opportunities. These are likely to be focused on product and distribution expansion.
At current levels, the shares are trading on a 1-year forward P/E multiple of ~29x, which is at a premium to the average multiple of ~28x for the past five years. We consider that, relative to the +10% EPS growth profile, the current multiple creates a less favourable risk/reward for investors in light of our concerns about the US expansion.
Charting View
ARB has fallen back to the uptrend line so it may find some support here and bounce higher. Resistance is up near $44. If it cannot hold onto this trendline, then the next support level is back near $37.
Michael Gable is managing director of Fairmont Equities.
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