ARB Corp: New cars in the lot and momentum is back for the stock

It's been a tough year with inflation and a cost-of-living crisis. And the first stocks to feel the pinch are ones exposed to the consumer. 

ARB Corp's (ASX: ARB) profit after tax declined 18.8% in the first half of the financial year, with macro consumer headwinds, softer domestic new 4x4 vehicle sales, and manufacturing overhead pressures all playing a role.

However, since then the company seems to be back on track, making up earnings in a strong second half, beating UBS estimates and reporting only a 5.2% decline by the end of June. 

In a recent note, UBS screened for stocks that could see outperformance on “rate relief sentiments”.  ARB sits near the top of the list of stocks poised to benefit. Morgans also listed it as one of their August consumer discretionary best ideas, noting US expansion is key.

In my conversation with Marc Whittaker of IML about the results, he raised the view that the selloff may not have been purely macro-driven and that the market had been also questioning the company's growth narrative. 

"The market was questioning it, whether directly or just through the broader macro sell-off and small caps being underloved. The valuation wasn't really pricing in the growth story at all. Now the market can start to entertain that narrative again."

Key results - 1H26

• Sales revenue down 3.8% to $702.0m vs $708m UBS ests (in line)
• Profit after tax down 5.2% to $92.4m vs $81m ests on a local GAAP basis (14% beat)
• Basic EPS after adjustments down 8.2% to 106.6c vs 99c ests (8% beat)
• Total ordinary dividends flat at 69.0 cps vs 65c ests (6% beat), with no special declared against 50.0 cps last year
• Balance sheet holds $47.9m of cash with no debt
• Aftermarket finished with a stronger second half, a solid order book and improving daily order intake

• FY27 supported by better supply of key 4x4 vehicles, including the reintroduced LandCruiser 70 Series and improved HiLux, Prado and LandCruiser 300 Series availability
• Export trends positive with UK registrations expected to recover and Europe performing well, though the Middle East remains hit by regional conflict
• OEM sales expected to improve in FY27 after a temporary decline, subject to supply chains and platform release timing
• Engineering investment to step up over coming years to lift the cadence of new product releases, with more detail at the AGM

Do you currently hold the stock and what is your rating?

We do hold it and we've been buying it - it's a fairly recent position for us. 

We bought it during the drawdown over the Iran situation and the broader market sell-off, at what we thought was a pretty good price. Our view was that it's a good quality business that had been oversold on macro concerns. We've watched it for a long time and finally arrived at a valuation where we were happy to start buying. Hopefully today's result is validating that in some small way.

If you look at the chart, the stock is basically half of where it was around this time last year. That was really our invitation to take a serious look. We're more on the quality-and-value side of the equation, and this stock had traded on a fairly punchy multiple for a long period of time. It had come back to what we thought was a far more palatable level. 

You still have to make a call on the ongoing quality of the business and its ability to keep selling into that OEM channel and the fitting market - and it looks like today's result has reaffirmed that trajectory, which is good.

What matters from the results?

It's a pretty simple story, really. The first thing is vehicle supply. Supply of new vehicles into the country has been impaired for some time, but we're finally starting to see that improve - and that's really the biggest driver. 

If you haven't got vehicles to fit or accessorise, your top line is going to be below where the market would like it to be. We're seeing Toyota advertising on television now, saying they've got supply in their dealerships. That's a clear signal. 

The key SKUs [stock keeping units] are the Land Cruiser, Prado, Ford Ranger and Hilux. All the major four-wheel drive vehicles are starting to recover, and that matters.

The second metric is the number of fitters and engineers they have to actually attach the accessories. It looks like they've started to turn that around — retention rates are much higher, they're keeping their core people and upskilling them. The corporate IP within the business is being maintained, preserved, and developed. That's important.

The third is the US business. The market backed that US story for a long period of time and there have been some question marks about how resilient or sustainable it really is. But this result looks pretty good — top-line growth of 14% in local currency, continued store rollout from eight stores to 30 and on to 47 over time. The beachhead they've established there looks sound.

And if there's a fourth, it's gross profit margin, which came in at a record level. There's some foreign currency tailwind and potential tariff add-backs in there, but despite a soft market, they maintained their profit margin — with a couple of price rises contributing as well. On a net basis, that's a pretty good effort. The quality of the business is coming through in this result. 

There's always been a perception it's a high-quality business, and after a couple of short-term headwinds that led people to question that thesis, this result reaffirms that the controllables are being controlled.

How do those outcomes affect the outlook?

They should continue to grow double digits. You've got contribution from offshore - the US, Asia, and Europe - and then in the local market, which is a very strong four-wheel drive and accessories attachment market, they'll continue to grow those OEM relationships. They're also still rolling out stores in Australia, so this isn't a mature domestic story, there are still genuine opportunities to grow here.

If these companies are growing double digit over the next two to three years, then something would have to have gone fundamentally wrong for that not to happen. We took advantage of the multiple roughly halving over the last year to jump in, and we expect the company to start re-rating back toward where the market has historically been happy to pay for it.

At the moment it still looks cheap, earnings are going the right way, and the growth story is compelling. The key is just the industry providing some tailwinds, and I think we're now at the point of an inflection in new vehicle supply, combined with the OEM relationships they're building out in the US. There's a lot of runway for growth if they execute, and I think they've proven they can execute.

Is the shift to electric vehicles a risk or an opportunity?

You're seeing a wave of Chinese EV four-wheel drives coming into the market and the interesting thing is that ARB highlighted they have relationships with every major Chinese OEM. The BYD Shark, Chery four-wheel drives, and so forth. 

The Chinese don't really know a lot about four-wheel drives, so they're probably using Australia as an education market. And who better to hold their hands than ARB? What are the right accessories? How do you fit them? What engineering needs to go into those products? The R&D that ARB continues to invest in is key not just to the established relationships they already have, but to these new Chinese brands coming in, and there's a plethora of them.

It's also worth noting that the accessories themselves are really power-agnostic. Whether you've got a petrol, diesel, or electric vehicle, if you're towing or trailing, or you need suspension, bull bars, or any other fit-out, you still need those products. 

So ARB won't be impaired by the shift to EV. And if you're a diehard four-wheel drive enthusiast, you're probably not going electric anytime soon. A lot of people moved toward EVs partly because of supply constraints - you simply couldn't get a Ranger or a Hilux without a long wait. 

But now that supply is coming back, those dyed-in-the-wool Ford and Toyota buyers will revert to what they know. And the broader car parc is still shifting toward SUVs and four-wheel drives — sedans and passenger vehicles are declining. That trend is going to continue, and ARB should continue to benefit.

What should investors be paying attention to as the story unfolds?

On the upside, it's the ongoing build-out of OEM relationships and the attachment rates that come with them. And the resonance of the ARB brand with consumers is very powerful. 

Consumer identification with ARB is very strong, and maintaining that matters. They need to continue investing in R&D and engineering. If you're not developing new products, you're going backwards.

On the risk side, the US is a real opportunity, but it's still early days. It's a beachhead, not a fully established operation. The risks are around the pace and execution of that rollout. 

There's also the question of margin maintenance. They've put two price increases through in the last 12 months, which has helped, but whether they can keep doing that against a softer consumer backdrop is something to watch.

Net-net, I'm quite positive. Vehicle supply is the big one for me. When that's no longer the headwind it once was, a lot of the rest becomes easier to manage. You can't buy a bull bar and store it in your garage waiting for the car to arrive. You need something to attach it to.

What could you be wrong about?

You have to assume the growth profile is going to be double digit out into the next five to ten years. They've got a long rollout in the US, they're moving into Asia, Europe, parts of the Middle East. You really have to back that story. 

They've proven they can do it in Australia, so you give them the benefit of the doubt that the markets they're moving into are equally receptive and capable of delivering that kind of growth over time.

But that's always the issue - it's a known unknown. You know what they're trying to do, they've proven they can do it here, and they've made some early wins in some of those geographies. But you're really backing the management team and their ability to execute. If there's a misstep, a misdirection, or they read the landscape wrong, that growth narrative will derail and the stock would de-rate.

That said, we'd argue that where the stock has been trading in the weeks prior to this result, it had already de-rated significantly on that growth narrative - the market was questioning it, whether directly or just through the broader macro sell-off and small caps being underloved. 

The valuation wasn't really pricing in the growth story at all. Now the market can start to entertain that narrative again and say, "We think it's still on track." If that's the case, it's looking pretty cheap.