Australia | Jul 15 2021
This story features ARB CORPORATION LIMITED. For more info SHARE ANALYSIS: ARB
ARB Corp, having unveiled a substantially strong FY21 performance, is shaping up for the growth opportunity presented by the US truck accessory market
-Underlying profitability strong despite cost pressures from freight and raw material prices
-Risk that sales activity in export markets decreases as travel restrictions unwind
-ARB Corp's association with Ford increases brand awareness
By Eva Brocklehurst
A strong surge in new vehicle sales has propelled ARB Corp ((ARB)) to flag a profit outcome that is well ahead of forecasts for FY21. Moreover, the relationship with Ford could shape up to be a game changer.
The order book is also robust, having increased to 10-12 weeks from 6-8 weeks in the first half. FY21 pre-tax profit is guided at $145-150m, up 86-92%. Revenue guidance for FY21 of $623m is also around 8% above consensus forecasts.
The highlights included improving US trading conditions and momentum in 4WD sales in Australia. The mid point of guidance implies a second-half pre-tax margin of 22.2%, around 30 basis points ahead of the first half, albeit Citi notes this is adjusted to exclude the first half JobKeeper subsidy.
Hence, the broker concludes underlying profitability is strong despite cost pressures from higher freight and raw material prices. Yet Macquarie assesses the pre-tax margin, including the subsidy, was down -240 basis points half on half, as manufacturing was scaled, although this may also reflect higher investment in growth opportunities and higher costs.
The company is intent on managing input costs and global supply chain pressures and while the order book is consistently strong the outlook is clouded by the pandemic. Macquarie suspects firm trading conditions in the Australian vehicle aftermarket are likely to continue while the international border is shut and the focus is on domestic getaways.
Hence, there is some risk that sales activity in key export markets such as the US, which comprises 35% of sales, decreases as travel restrictions are unwound. This could be a leading indicator for the Australian business when travel normalises.
Citi believes there are multiple growth drivers, including the Ford partnership and export opportunities in the UK following the acquisition of Truckman. There is also signs the consumer is increasingly attracted to SUVs and 4WDs.
The Federal Chamber of Automotive Industries has indicated new vehicle sales rose 28.3% in the June half and, critically, key segments are outpacing the more traditional passenger market. Sports utility vehicles (SUV) increased 37.6% and light commercial vehicles (LCV) increased 32.7%.
Ord Minnett agrees future sales will be driven by demand from these segments as well as further expansion of the store network in Australia, along with penetration of offshore markets. The stock remains its top pick in the automotive parts sector.
Nevertheless, the broker agrees the opening of international borders, potentially in the second half of FY22, is a possible offset as well as a lack of benefit from superannuation withdrawals. On the other hand, Ord Minnett expects growth opportunities could include the expansion of the company's Thai manufacturing facility as well as other acquisitions.
The next catalyst is the FY21 results on August 17 where there should be more detail on the drivers of the result, acquisitions and growth opportunities.
Wilsons reiterates its view that recent developments in the US market have sufficient commercial relevance to ARB for the company to consider complementing wholesale operations with a retail store network.
ARB is supplying Ford with product for accessory packages on its Bronco and Ranger models and first sales are expected shortly. The US truck accessory market, therefore, represents a significant growth opportunity.
The association with Ford will also increase ARB brand awareness. The broker models a scenario where the US segment sales will increase to $737m by FY35. Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database has an Overweight rating and $48.40 target.
FNArena's database has two Buy and two Hold ratings. The consensus target is $42.01, signalling 1.5% upside to the last share price.
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