Company Overview: ARB Corporation Limited (ASX: ARB) is engaged in the business of designing, manufacturing, distribution, and sale of motor vehicle accessories & light metal engineering works. The company has ARB store network of retail customers, ARB stockists, new vehicle dealers and various fleet operators. Currently, it possesses 72 ARB stores in Australia (29 - Company owned). From the geographic standpoint, it generates its revenue from Australasia, USA, Thailand and Middle East, Europe & UK. The company started to trade on ASX in 1987.

ARB Details 

Key Takeaway from 1HFY22:

• Decent Revenue Performance: As per its half yearly updates released on 22^nd February 2022, despite the low availability of new vehicle globally, ARB increased its sales revenue by ~26.5%. Where growth in all customer segments having retail, stockists, dealer and fleet of Australian Aftermarket grew by ~15.6%, its overall % of group sales decreased to ~53% from ~58% on pcp basis.
• Export Growth: With the growing exports in US, Europe, NZ, Thailand and including Auto Styling Truckman sales (UK) for all of H1 FY22, the overall exports increased by ~39.9% on pcp basis.
• On Rise Profitability: Even though the distribution costs remained historically high and increase in operating expenses, the group managed to grow its net profit after tax by ~27.6% to $68.9 million in 1HFY22 as compared to $54.0 million in 1HFY21. The gross margin also improved, leading to EPS up by ~25.5% on 1HFY21.

Key Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 35.17% of the total shareholding, while the top 4 constitute the maximum holding. Bennelong Australian Equity Partners Pty. Ltd. and Rogand Pty. Ltd. are holding a maximum stake in the company at ~12.48% and ~7.16%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company recorded a substantial increase in its cash balance from 2019 to 2021 from $8.5 million to $84.80 million, respectively. Moreover, its total debt also increased during that period from Nil to $45.10 million.

Liquidity Profile & Debt Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

1. COVID-19 and Omicron Variant Risks: Due to COVID-19 and the new variant, the company might get affected by the lockdown regulations and restrictions, which might affect its sales and operations.
2. Currency Price Risks: Considering the market volatility, and company’s global business its price is dependent on the external demand and supply of the raw material etc.
3. Technology Risk: The business is quite dependent on the technology it applies for designing and manufacturing, failure of using the right technology might affects its efficiency and demands.
4. Demand & Supply Gap: The new vehicle availability has been witnessed as a major challenge globally, along with global logistics and pricing, which thereby affects stock availability and its management.
5. Labour Market: Availability of labour at right cost also affects its operations and profitability.

Outlook: The company has a decent long-term outlook backed by strong customer order book, improved inventory levels and new product launches that are yet to be released to the market. Currently, ARB is focused on providing a wide variety of Ford Ranger and Ford Everest products in June 2022 and August 2022, respectively. As per the company’s report, Ford Licensed Accessories (FLA) will be rolled out in the New Zealand market later this year. This might help the customers with the option of purchasing selected ARB products directly from Ford dealers with the 5-year new vehicle warranty supported by ARB’s established distribution network. Moving forward, the company seems to be well positioned for growth trajectory aided by loyal customer base, strong balance sheet position, new product launches, improved distribution and increased manufacturing capacity. With the current ~50.6% increase in its OEM (original equipment manufacturer) sales (contributing ~8.5% of total sales) and an expectation of slight fall in OEM sales in FY22, the company is stocking up and preparing itself for new vehicle model launches and the addition of new business.

Valuation Methodology: Price/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of ARB is trading lower its 52-weeks’ average levels of $33.32 - $55.00. The stock gave a positive return of ~26.60% in the past three months and a negative return of ~16.42% in the past one month, proffering a decent opportunity for accumulation. The stock has been valued using Price/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at slight discount to its peers’ average multiple, because of the increase in cash cycle days, supply chain constraints and new vehicle availability, and expected reduction in OEM sales. For the purpose of valuation, few peers like PWR Holdings Ltd (ASX: PWR), Apollo Tourism & Leisure Ltd (ASX: ATL), Carsales.Com Ltd (ASX: CAR), and others have been considered. Considering the rise in sales revenue, growth in NPAT, upside potential in valuation, global expansion and hiking exports, current trading levels, new products and factory in process, optimistic long-term outlook, and the key risks associated with the business and current market volatility due to global tensions, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $36.98, down by ~3.849%, as on 8^th March 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

ARB Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

The Green colour line reflects the 21-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 21-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).

The Blue colour line reflects the 50-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 50-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).

The Yellow colour line reflects the Trendline, which shows whether the direction of the scrip is upwards or downwards.

The Purple colour line in the chart’s lower segment reflects the Relative Strength Index (14-Period) which indicates price momentum and signals momentum in trend. A reading of 70 or above suggests overbought status while a reading of 30 or below suggests an oversold status.

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