ARB Corp Investing For US Growth

This story features ARB CORPORATION LIMITED. For more info SHARE ANALYSIS: ARB

ARB Corp provided a disappointing first quarter update, but brokers are more focused on the growth opportunity offered by a recent transaction in the US.

-ARB Corp’s profit slightly down year on year
-ARB boosted by a new deal in the US
-Further bolt-ons also announced
-Analysts look to future benefits of investment

By Greg Peel

ARB Corp ((ARB)), which designs, manufactures and distributes 4WD parts and accessories to trick up your vehicle for rural, off-roading, camping and so forth, has seen a volatile couple of months.

Following an FY24 earnings report that met consensus expectations, analysts were generally positive on the company’s performance but less so about its valuation, which suggested further upside might be a struggle. An announced US acquisition in early September then had the stock surging once more.

That positive momentum reversed last week when management provided a first quarter FY25 trading update at the company’s AGM.

The company reported sales up 6.5% year on year, suggesting a first half run-rate shy of forecasts, such as Ord Minnett’s 8.5% assumption. It was a mixed bag by division. Australian aftermarket sales increased 5.5% compared to 2.1% in the first quarter last year. Export sales increased 10.4% compared to falling -7.8%, and original equipment manufacturer (OEM) sales declined -2.0%, having risen 35.4% last year.

Gross profit margins were largely in line with the prior period, however, profit was down slightly compared to last year. This was due to a higher cost of doing business, in particular labour and transaction costs.

The market responded negatively, but analysts were not so fussed, focusing more on the opportunity ahead for the company.

Despite a modest decline in first quarter profit, the company’s fundamentals remain unchanged, suggested Ord Minnett. A strong order book, accelerating export sales and bolt-on acquisitions should drive medium term earnings growth.

Citi understood some in the market were disappointed after the trading update revealed slower-than-expected revenue growth and a surprise decline in profits. However, taking a step back, the broker sees ARB building the platform for long-term sustainable growth in the US.

4 Wheel Parts

In early September, US-based ORW (Offroad Warehouse), partially owned by ARB, agreed to buy US-based 4 Wheel Parts (4WP) from private equity for US$30m. As part of ORW’s purchase of 4WP, ARB will lift its ownership in ORW from 30% to 50%.

4WP currently operates 42 retail stores and associated e-commerce sites, selling 4WD accessories across the US.

That increase in ownership is a function of ARB effectively providing greater contribution to the funding of the transaction than its current shareholding requires. It is not clear to Canaccord Genuity at this stage how much of the US$30m ARB will contribute as part of the transaction.

Greg Adler, who is the primary owner of ORW, previously had a long history with 4WP and Canaccord believes he understands that business very well. The broker notes ORW currently has 11 stores with plans for two additional stores (outside this transaction). This transaction will materially lift the footprint of ORW.

In Canaccord’s view, 4WP is not the business it was several years ago, but Adler is the CEO that last had it running well, and the broker expects he is well-placed to turn it around.

In Wilsons’ view, the transaction is positive, given the scale it adds to the ORW store network and familiarity existing ORW and ARB executives have with the business. Wilsons is enthused by ARB’s progress on broadening its US distribution platform, adding confidence to the broker’s standing assumption that US sales will grow some 20% pa over the next 5-plus years.

Retail is an important channel to market for ARB in the US market, Wilsons suggests, in terms of sales generation and building brand awareness. ARB’s investment in ORW provides access to a well-credentialed specialist retailer, and on favourable terms in relation to ARB brand representation in store. Wilsons understands ORW stores are currently generating strong like-for-like sales growth.

And There’s More

As part of the related transaction, ARB will buy Poison Spyder brand from the same private equity firm for US$1m. In a similar vein to 4WP, Canaccord believes this has limited financial impact in the near term, but is strategically very sound. Poison Spyder offers Jeep armour products.

Canaccord believes ARB is underweight Jeep product in its portfolio. This has not been an issue in Australia where Jeep is more of a niche brand, but more of an issue in the US where it is a key brand for offroad enthusiasts.

Citi sees ARB building the platform for long-term sustainable growth in the US by significantly improving its US distribution through the 4WP acquisition, and deepening its relationship with Toyota US with additional contracts expected. The Texas distribution centre will more than double in size from December 2024, and ARB has additional distribution centre space leased in California.

ARB is also increasing its manufacturing capacity through investment in automation and coating line in Thailand) and increasing R&D (a US facility to increase localisation and speed to market should be ready in December 2024).

Additionally, back at home, ARB announced the acquisition of MITS Alloy, a producer of ute trays and canopies in NSW.

Near-Term Earnings Downgrades

ARB will benefit, Ord Minnett suggests, from an uplift in export sales from an increased representation within the ORW/4WP stores. Offsetting this, the broker expects ARB to initially report a small loss from the combined ORW/4WP retail operations.

Following the acquisition of MITS Alloy, Ord Minnett expects an uplift in Australian aftermarket sales. Overall, given the slightly slower start to the year, this broker has lowered its FY25 earnings forecast by -2%, but upgraded FY26-FY27 by 2% and 4% respectively.

Ord Minnett has a Buy rating and $46 target price, down from $47 pre-update.

Morgan Stanley retains a $46 target and an Overweight rating, having provided a brief update.

Citi has cut its FY25 profit forecast by -11%, reflecting investments for future growth and non-recurring transaction costs. FY26 and FY27 forecasts fall by a lower amount (-5% and -4% respectively) as the broker expects strategic initiatives implemented by the company will be less one-off in nature.

Citi has nevertheless increased its target to $50 from $48, and retained Buy, with earnings changes offset by higher multiples.

While Wilsons’ changes to earnings forecasts are modest, this broker sees further upside risk and considers the 4WP transaction as adding confidence to an assumption that US segment sales grow around 20% pa over the next 5-plus years. Wilsons also lifts its target, to $47.85 from $47.52, which is based on an FY25 PE of 35x, despite ARB’s historical range of 20-30x.

Wilsons is also Overweight.

More circumspect is Canaccord Genuity. This broker has been cautious on ARB around its current multiple and believes there is some risk to FY25 consensus forecasts. Although that risk is small, ARB’s one-year forward PE multiple of 30x means even small misses can be punished, notes Canaccord.

Although 4WP is a very strong strategic transaction, it is unlikely to change FY25 numbers positively in this broker’s view as it is likely 4WP is not profitable in FY25. Canaccord’s summary view is that this is a strong strategic transaction but with likely no material financial benefits until FY27.

Canaccord has a Hold rating and $38.30 target.

Harking back to the aforementioned FY24 result release in August, Macquarie held a Neutral rating and $43.80 target and Morgans was on Hold with $38.50.

UBS liked positive incremental US growth (pre 4WP transaction), a solid to positive outlook for aftermarket/export orders, another FY25 Toyota contract and four-plus new store openings in FY25. However, much of this and the FY25 earnings outlook was believed by UBS to be discounted in the share price, with little potential seen for consensus earnings upgrades.

UBS kept its Sell rating and $34.50 target price.

None of Macquarie, Morgans or UBS have to date updated on the 4WP deal or first quarter trading update.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArenais proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms