Opportunity For ARB In US Trade War

This story features ARB CORPORATION LIMITED. For more info SHARE ANALYSIS: ARB

Vehicle component manufacturer/distributor, ARB Corp, has presented a cautious outlook at its AGM, noting a slower rate of growth in the first quarter of FY19.

-Easing back to more sustainable levels of growth always considered likely
-Mining regions continue to be supportive, bottlenecks reducing
-US trade spat with China supports ARB versus competitors
 

By Eva Brocklehurst

The pace of growth has slowed for ARB Corp ((ARB)), Australia's largest manufacturer and distributor of 4WD accessories, amid softer domestic conditions and delays in major new vehicle models. The company presented a cautious outlook at its AGM, noting a slower rate of growth in the first quarter. ARB Corp has singled out changes to key vehicle models as well as input price pressures and weaker consumer demand.

Changes to models, specifically for Toyota Hilux and Ford Ranger, have occurred and such changes often affect sales, albeit temporarily. For example, sales of the Ford Ranger declined -25.2% in September, the automotive industry's VFACTS statistics indicated, as consumers preferred to await the new model.

Bailieu Holst notes the company is cycling strong sales growth of 12.4% from the first half of FY18, so an easing back to more sustainable levels of growth is always likely. The broker notes Australia's new vehicle sales declined -4.9% in the first quarter of FY19, although there was growth in the company's key segments of 4WD sports utilities and 4WD utilities.

Citi does not find the AGM update necessarily negative, suspecting the business is returning to historical averages for sales growth of around 7-8%, which is in line with expectations for FY19 growth of 7%.

Input Pressures

While the company is managing what is controllable, a weaker Australian dollar is pressuring inputs such as electricity, gas and steel prices. These are expected to limit operating margin improvements in the near term.

Bailieu Holst modestly downgrades forecasts for FY19 and FY20 and, not one of the eight stockbrokers monitored daily on the FNArena database, maintains a Hold rating and $19 target.

Macquarie expects some price increases for the company's components should eventuate, providing some offset to the input pressures, albeit with a lag. Mining regions continue to improve, which supports 4WD consumption, and investment in additional capacity and staffing is reducing the bottlenecks associated with fit out. Management expects to add four stores in FY19.

US Operations

The US operations are benefiting from continued growth in distribution, although the trade wars have weighed on sentiment and created some uncertainty among importers and wholesalers. Macquarie suggests the competitive positioning of ARB should improve materially because its manufacturing is located in Australia and Thailand, versus competitors that typically source or manufacture out of China.

The broker believes the market has priced in its concerns, with the stock having declined -23% from the highs reached back in June. The broker believes the factors putting pressure on the business over FY19 should be temporary and, as the competitive positioning has improved, maintains an Outperform rating.

Citi points to manufacturing efficiencies following the move back to Kilsyth and the re-location of the national warehouse to Keysborough, both in Victoria. ARB Corp has also commenced work on a new warehouse in Thailand, situated in a free trade zone, which will afford more space.

The broker believes the escalating trade wars should present opportunities for ARB going forward, given its Australian and Thai manufacturing base. Citi maintains a Neutral rating. Ord Minnett, yet to update on the AGM, has a Lighten rating. On the database the consensus target is $20.45, suggesting 14.8% upside to the last share price.

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