ARB Corp’s Making America Great(er)

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Analysts approve of ARB Corp’s two US acquisitions which are expected to build brand awareness and provide medium-term upside.

-ARB Corp announces US distribution and brand acquisitions
-Purchase of 4 Wheel Parts includes 42 retail aftermarket stores
-Canaccord Genuity sees no financial benefit until FY27
-The company’s Jeep product will be boosted by Poison Spyder

By Mark Woodruff

Analysts seem pleased by ARB Corp’s ((ARB)) latest effort to widen distribution of 4WD accessories into the US, and, in a separate deal, pick-up a local US brand with more potential appeal to the US consumer than its own legacy brand.

Providing scale to the store network of the company’s US-based associate Off-Road Warehouse (ORW), the latter has entered a conditional agreement to acquire 4 Wheel Parts from private equity owned Hoonigan (formerly Wheel Pros) for -US$30m, subject to court approval.

4 Wheel Parts currently operates 42 retail aftermarket stores and associated e-commerce sites, selling 4×4 accessories across the US.

Ord Minnett believes ARB will invest between -$25-30m as part of the transaction and points out the company’s export sales will also benefit from increased investment in the Off-the Road Warehouse/4 Wheel Parts store network.

The company also has third-party distribution agreements in the US, Australia and numerous other export markets.

Apart from expanded distribution, Wilsons notes earnings drivers for ARB include the ongoing structural shift to SUVs, new vehicle model releases, and new product launches including in collaboration with original equipment manufacturers (OEMs).

More broadly, ARB 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.

Retail is an important channel to market for ARB in the US market, explains Wilsons, in terms of sales generation and building brand awareness.

Already, ARB’s investment in Off-Road Warehouse provides access to a well-credentialed specialist retailer, note the analysts, and on favourable terms in relation to ARB brand representation.

Currently generating strong like-for-like sales growth, as highlighted by Wilsons, Off-Road Warehouse has recently opened an eleventh store.

Picking up on the point made by Wilsons on the importance of brand awareness, Citi suggests the expanded store presence and more prominent in-store ranging will be a significant benefit to ARB.

This broker also highlights ARB’s recent investments in its US distribution assets should assist with the likely scale-up in revenue. The Texas distribution centre has more than doubled in size and the company has also leased an additional distribution centre in California.

Easing concern over business familiarity and continuity, Wilsons highlights several former 4 Wheel Parts executives hold senior roles in both Off-Road Warehouse and ARB.

Canaccord points out Off-Road Warehouse’s primary owner Greg Adler had worked in 4 Wheel Parts from 1992 and was President and CEO until April 2018.

While expecting a positive share price reaction to the 4 Wheel Parts deal, Canaccord cautions the business has been in decline since its sale to Polaris Inc in 2016, and that decline has accelerated since it has been owned by Hoonigan.

Despite excitement over the increased store count for ARB, the analyst suggests it may take some time to turn this transaction into earnings, making a positive change to the broker’s FY25 forecast number unlikely.

On the other hand, Canaccord points out the purchase price for 4 Wheel Parts is less than the cost of setting up 42 stores, thereby providing Off-Road Warehouse with a significant buffer to make the deal work.

Should the acquisition be successful, Off-Road Warehouse will settle the purchase of the 4 Wheel Parts assets using additional funding provided by its shareholders, resulting in ARB increasing its shareholding in Off-Road Warehouse to 50% from 30%.

Effectively, the increase in ownership is a function of ARB providing greater contribution to the funding of the transaction than its current shareholding requires, explains Canaccord Genuity, noting it’s unclear at this stage how much of the US$30m ARB will contribute as part of the transaction.

A separate deal

In a strategically sound move, according to Canaccord Genuity, ARB will also buy the Poison Spyder brand from Hoonigan for -US$1m. The brand offers Jeep armor products to provide one’s Jeep with the necessary ‘armor’ to tackle any terrain.

In the US, ARB has been underweight Jeep product in the product portfolio, which hasn’t been an issue in Australia where Jeep is more of a niche brand.

Viewing this transaction in a similar light as the recently acquired 49%-stake in Nacho Offroad Technology (offering a range of innovative off-road lighting products), Citi notes management strategy is to acquire local US brands which resonate more with US consumers than legacy brands in Australia.

The move on Poison Spyder follows hard on the heels of ARB’s investment into a new US based R&D facility to support the development of localised products, points out Morgan Stanley.

Potential upside from ARB’s Off-Road Warehouse investment

Wilsons believes ARB is currently generating annualised revenue of between $5-7m from product sales into Off-Road Warehouse.

When the broker assumes similar store metrics and terms for the acquired 4 Wheel Parts stores, a further $25m of revenue could flow to ARB.

While a strong strategic transaction, Canaccord sees no material financial benefits until FY27.

Gaining control of Off-Road Warehouse would provide a significant medium-term tailwind for ARB Corp in Morgan Stanley’s view, via the opportunity to improve store performance and rollout potential.

This broker raises its target to $46 from $40.50 and upgrades the rating to Overweight from Equal-weight. ARB also makes Morgan Stanley’s list of key small/mid cap ideas post the August results season.

Not only is US distribution falling into place, but also OEM collaborations are taking shape, highlight the analysts. ARB is brand partner with Toyota on Trailhunter program launches (Tacoma and 4Runner), with another program coming up in FY25.

The arrangements with Toyota -and another with Ford- assist both distribution and brand position, explains Morgan Stanley.

This broker suggests the fruits of ARB’s strategic investments (in Australia but particularly in the US) will become more obvious in earnings numbers in FY25 and FY26.

Within the FNArena database where brokers are monitored daily, there are three Buy or equivalent ratings, two Holds and one Sell rating (Ord Minnett).

The average 12-month target price of these six brokers rises to $42.80 from $41.25 (though two are yet to refresh research post acquisitions) which is only -1% short of the ARB Corp share price at the close of trade on September 10.

Outside of daily monitoring, Wilsons and Canaccord Genuity are on Overweight and Hold, respectively, with an average target of $43.08.

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