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ARB Corp's third-quarter performance showcased why shares continue to trade at a premium to the Small Industrials Index.

-Analysts raise targets for ARB Corp post Q3 results
-Positive sales momentum across three key divisions
-The US strategy is improving, according to Citi
-Recent US investments performing well
 

By Mark Woodruff

To the avid observer, shares in ARB Corp ((ARB)) are trading at a noticeable premium to most small cap industrial companies in Australia, and they have been for the past decade. Analysts suggest ARB's recent market update provided yet more evidence as to why this relative valuation premium remains justified.

Management at the company is proud of regular investments made into R&D with analyst commentary post the recent trading update suggesting ARB Corp’s consistent valuation premium compared to the Small Industrials Index reflects a longstanding reputation for quality and innovation in four-wheel drive accessories.

The company continues to grow and diversifying its distribution footprint, most notably in the US, where sales returned to growth in the third quarter. This expansion is coupled with a bullish outlook from management on near-term trading conditions.

The combination of positive third quarter sales growth plus a positively trending order book suggests potential for growth in new business, according to Wilsons. This broker forecasts a further near-term acceleration in Export sales growth.

ARB Corp develops, manufactures, distributes, and retails four-wheel drive vehicle accessories, necessitating manufacturing and warehousing facilities in Australia and Thailand, and an ARB-branded retail store network in Australia. There is also third-party distribution in Australia, the US and numerous other export markets. The company's first retail outlet in Seattle is on course to open its doors for business in Q4 this calendar year.

Ord Minnett recently upgraded ARB to Buy from Accumulate following third quarter results, while, yesterday, Macquarie moved to a Neutral recommendation from Underperform.

Revenue in the third quarter rose by 6% compared to the previous corresponding period, as US sales grew in a flat market due to improved inventory, distribution, and a new eCommerce platform, explained management.

Momentum was positive across Australian Aftermarket, Export and OEM (the three key segments), with sales up on the previous corresponding period by 7%, 2% and 24%, respectively.

Reflecting the growing importance of the OEM division, the company has split in two the management structure in the US, with new heads of Aftermarket and OEM.

Sales in Australian Aftermarket for the quarter benefited from record new vehicle sales in FY24, and increased investment in the ARB store network, observed Ord Minnett. Additional staff were also employed to improve fitting capacity.

Improving new vehicle supply in the UK and Europe, and a return to sales growth in the US, lifted Export sales, explained the analysts, while OEM sales were boosted by purchases from both new and existing customers.

As third quarter trading was in line with Macquarie’s expectations, this broker’s upgraded rating was solely due to a change in valuation method to reflect the company’s consistent history of trading at a premium to the market.

The share price has traded at a 20% average premium to the Small Industrials Index over the last ten years, reflecting a quality business with offshore growth optionality, in the broker’s view.

Improved inventory, enhanced distribution through the Dallas distribution centre, and the addition of eCommerce combined to deliver third quarter growth, explained Macquarie. Longer-term growth options include the second quarter FY25 opening of the Seattle retail site, and new products which will be factory-fitted to Toyota Trailhunter models of the Tacoma and 4Runner.

ARB has a long and successful history of product development, noted Wilsons, and the current Old Man Emu (OME) MT-64 suspension product is looking promising, in the broker’s opinion.

Citi highlighted a greatly improved US strategy as management takes greater control over distribution, gains richer customer insights from its new website, and begins a promising partnership with Toyota.

US Investments

Talking of US strategy, Morgans noted both of ARB’s US investments, acquired in the 1H of FY24, are exceeding expectations.

Nacho LED (cutting-edge lighting solution) won its first major contract with US-based Fox Factory Holding Corp, and Off Road Warehouse (accessories) signed its eleventh site with further locations under review.

Management also highlighted various initiatives have been put in place to optimise the company’s Toyota USA brand association.

In a further potential accelerant for growth, Citi highlighted ARB’s balance sheet optionality to make further acquisitions.

Outlook

After Australian Aftermarket sales grew by 4.6% in the nine months to the end-of-March, Macquarie feels the division is well positioned for growth, with domestic vehicle supply trending positively, and given the ongoing rollout of new stores.

Fitter capacity is also on the improve, noted the broker, while the Ford Australia License Accessories by ARB (FLA) program remains a positive, with Ford websites promoting and offering an extensive range of the company’s products.

Ord Minnett also highlighted improving supply of new vehicles in Australia, along with upside from the accelerated investment in the ARB store network. It’s also felt the strong order book bodes well for ARB's Australian Aftermarket revenue growth in the second half.

The Export division is starting to trend positively, according to Morgan Stanley, though the analysts cautioned this trend is subject to volatile quarter-to-quarter swings.

Morgans also warned ARB Corp remains subject to numerous consumer-facing headwinds such as cost of living pressures and a cyclical operating market. This broker retained a Hold rating with a 12-month target of $39.10, up from $38.30.

The average target price of five covering brokers (updated daily in the FNArena database) has increased to $40.58 from $37.80 over the past week, suggesting 3.5% upside to the latest share price.

Analysts currently have three Hold (or equivalent) ratings and two Buy recommendations.

Outside the database, Overweight-rated Wilsons lowered its target to $44.39 from $45.69 following the third quarter trading update.

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