ARB: Good result from a tough market

Overall, ARB’s FY19 result was largely in line with expectations, in spite of the soft market conditions. The predictability of the result was reassuring and it is enjoying a relief rally on the back of this. 

Looking ahead, some challenges remain, particularly the strength of the Thai Baht. While the lower Australian dollar increases ARB’s offshore revenue opportunities, it has a short term impact on the cost of the company’s Thai manufacturing product and negatively impacts sales margins. While this can be somewhat offset by cost control measures, the stronger Thai Baht will continue to impact the first half of the FY20 financial year.

Key takeouts from the report

ARB is a high-quality business but its share price has struggled to reach the highs of previous years. Its FY19 result was largely in line with expectations because the key headwinds have been well known – weakness in Australian SUV and 4WD car sales, trade tensions dampening importer sentiment, soft retail conditions and the relative strength of the Thai Baht.

In FY19, these issues came to the forefront with Australian aftermarket sales decelerating over the year to finish at a modest 1.6% yoy growth. This was a good result considering flat new vehicle sales of medium to large SUVs and 4WD utilities (ARB’s target market), whilst total Australian car sales posted their biggest annual fall in more than 9 years. 

It is also a commendable result considering they were cycling high levels of growth (+11.4%) in the previous year. There is a strong correlation between house prices and car sales, so the question is when improving house prices will start to lift new car sales, particularly in NSW where sales have been flat.

The soft Australian aftermarket result was offset by ongoing strength in Export sales which grew strongly at 9.8% over the year. Sales growth was achieved from the Company’s distribution centres in Australia, the USA, the Czech Republic and Thailand and were assisted by the weaker Australian dollar. We see this as a key area of opportunity going forward as ARB commits greater engineering resources to increase product range and speed to market.

Original Equipment sales increased 17% and the pipeline of new contracts continues to remain robust over the medium term, however it is worth remembering that OEM sales are lower margin.

The market can under-appreciate the strength of ARB’s cash flow generation and balance sheet with the business finishing the year with no debt on the balance sheet and a cash balance of $8.5m. ARB is coming to the end of a capex program which supported the development of a 20,000 square metre free trade zoned global warehouse in Thailand. This is expected to be operational in the next two months. Capex will likely normalise after this, allowing greater free cash flow generation and the potential for higher dividends with plenty of scope given the payout ratio is only 55%.

ARB’s Net Profit After Tax has grown at an average compound rate of 9.7% over the past 10 years

Source: ARB

Ensuring long-term success

Longer-term, ARB still deserves to carry a quality premium given its market-leading position, high calibre management team and net cash balance sheet which carries no debt. 

This affords it flexibility to continue investing, even while market conditions are soft, in manufacturing expansion and research & development where expenditure increased 37%. This is important because new product development is the lifeblood of the business and reinforces its competitive advantage. This should continue to ensure the long term success of the business.  

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