Why you should bet on ARB Corporation Limited shares


Shares in ARB Corporation Limited  (ASX: ARB) have quietly risen almost 33% in the last 12 months almost without anyone knowing, despite the All Ordinaries rising barely 1%.

The February half-year profit announcement shows that revenues and net profits were up 7.8% and 14.0% respectively despite an acknowledgment by senior management that the mining slowdown has indeed affected sales in many of the regions in which ARB’s products are sold.

For those who aren’t across the what the company does, ARB is in the business of designing, manufacturing and distributing SUV and light commercial vehicle accessories here in Australia and to over 80 countries around the world.

This is quite a different business model to that of Burson Group Ltd  (ASX: BAP) and Supply Network Limited (ASX: SNL) which, respectively, are in the business of distributing replacement automotive and truck/bus parts, but nevertheless operate in the same Auto Parts and Equipment sector.

Last week, ARB provided a company update on its progress for the three quarters to the end of March 2016.

The bad 

Excluding a property sale in the USA, ARB’s underlying net profit actually only increased by 8.1%, not the headline growth of 14% as reported.

The Australian Aftermarket division too had experienced a rise in sales of only 5% for the period to 31 March 2016 which compares with growth of 7.6% for the previous financial year.

Part of the reason for the lower growth rates in the Australian Aftermarket is the effect the mining slowdown is having in parts of Australia, and the unusually high number of vehicle releases that occurred in the half-year to 31 December 2015.

So, it appears at first glance that sales growth is moderating.

And now the good

The bad news of high vehicle release numbers over a very compressed time period is actually also a benefit for the company. Whilst this is causing some problems for the supply of accessories to customers in a reasonable timeframe due to a lack of resources, management has strategies in place to deal with the strong (almost overwhelming) demand for its products; a nice problem to have.

ARB is increasing its labour force and the amount of overtime at its manufacturing facilities in Australia and Thailand which bodes well for sales and profit growth, especially into the 2016-17 financial year as supply bottlenecks reduce.

It’s also pleasing to see that exports for the company are now over 25% of total company sales. With a presence soon to be established in Dubai to serve the Middle East (in addition to the USA and the Czech Republic), a focus on strengthening overseas sales teams, a commitment to research and development, and market dynamics that show SUV/4WD vehicles now command more than 50% of total vehicles sold in Australia (up from 34% just five years ago). I think there’s a lot more growth in this company still to come.

What I like about ARB are its:

  • strong demand for its products,
  • international manufacturing and sales strategy,
  • shareholder-friendly management of capital,
  • organic growth characteristics, and
  • management quality (I believe ARB has one of the best management teams of any listed company on the ASX)

Naturally, such quality is expensive, at least for now. It’s no wonder though given management executed their business strategy so consistently since listing in 1987.

ARB’s shares trade on a PE of almost 27 times earnings but if you’re patient, you may find better buying opportunities ahead. Management have warned that profit growth will be constrained in the current half year due to catch-up product development costs and the recent expansion of warehouse capacity.

Hopefully, later this year ARB’s stock will decline on the news and savvy buyers will have a chance to buy shares in this great business at a discount to where it is now.

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Motley Fool contributor Edward Vesely has no position in any stocks mentioned. The Motley Fool Australia owns shares of Burson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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