Why the ARB Corporation share price could be set to soar

ARB Corporation Limited (ASX: ARB) could see its share price soar over the next few months, after an unusually high number of 4WDs and utes were released in the second half of the 2015 financial year.

Those models included the Nissan Navara, Mitsubishi Triton, an updated Ford Ranger, Toyota Hilux, Toyota Forerunner, Ford Everest and an updated Toyota LandCruiser 200 Series.

According to the Australian Financial Review, ARB’s team of 50 research and development engineers were forced to drop their existing projects to accelerate the manufacturing work on new products, including bull bars to fit the new models.

ARB saw revenues grow by 7.4% in the first half of the 2016 financial year (FY16), partly because the company couldn’t keep up with demand for specialist products to fit the new models being released in Australia. Chairman Roger Brown says the company is finally getting on top of the backlog – after many customers with a new Hilux forced to wait up to three months to get a new bull bar.

It was an awkward time. It’s not over yet, but we are getting there,” he told Fairfax Media.

The Toyota Hilux is hugely popular with tradies and 4WD fans and was the third-highest selling vehicle  (of any type) in Australia in 2015, according to the Federal Chamber of Automotive Industries.

Mr Brown says the popularity of SUVs and 4WDs continues to rise and combined look set to capture more than half of the total automotive market in Australia. “The future looks pretty good,” Mr Brown says.

The news also augurs well for Burson Group Ltd (ASX: BAP) and its Opposite Lock specialist 4×4 franchisor and wholesaler business, which was acquired from Metcash Limited (ASX: MTS) in July 2015. Burson paid an additional $12 million for Opposite Lock on top of the $275 million Burson paid for the rest of Metcash’s Automotive assets business.

Opposite Lock has 53 franchise stores and 2 company-owned stores, while ARB also owns 53 stores in Australia, of which 24 are company owned.

Foolish takeaway

ARB shares currently trade on an annualised P/E of ~25.8x, but sales should grow strongly in the second half of 2016. At current prices, this may be an opportunity to pick up a high quality business.

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Motley Fool contributor Mike King owns shares of Burson. You can follow Mike on Twitter @TMFKinga

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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