ARB Corporation: An analysis (30/09/2014)
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Richard Haynes
:
Hi Scott,
Thanks for the video, I am a long term fan of ARB, they’ve made me quite a bit of money over the years so was interested to watch this. Here’s my take on the questions:
1) More stores? It looks like about 70% of ARB’s sales are aftermarket, so it seems like an obvious place to expand but I’m not sure how much more opportunity exists for this in Australia. The Brown brothers have either been extremely lucky, or they are very, very good at allocating capital. I doubt if there was a longer term easy win for them on home soil they’d be bothering with overseas markets.
2) Can they sustain margins? They seem to have some headwinds, it will be difficult. Rob mentioned the link between the growth in the mining sector and sales. This link to twofold. Firstly, the parts that they would sell to mining companies to fit out new vehicles is going to be hit. Secondly, as mining construction (and potentially production) employment shrinks, the free income of what is probably one of their strongest customer groups is going to shrink. At the same time there’s retail competition from Opposite Lock, TJM, Super Cheap Auto. Whilst I agree that there’s a move towards SUVs I would like to know how many of these actually make it off road (and how many of the owners have even heard of ARB). One thing that may provide a slight reprieve may be the rising number of potential grey nomads who are all going to want to trick up their chosen caravan towing steed with some shiny, expensive accessories.
3) TJM market share? TJM are one of a surprising number of participants in this market. ARB seem to be the most sophisticated, they seem to pay a lot of attention to R&D and have a very diverse product range. There’s definitely very strong competition in the retail environment. ARB and TJM both seem to be vertically integrated. Perhaps this is a case of two good businesses finally saturating the Australian market (along with other competitors like OL and Super Cheap Auto)?
rob barnett
:
Scott,
As you have rightfully identified, ARB has been a wonderfully well run company but now there are some significant challenges. Shareholders have probably not truly appreciated the link between the growth of the mining sector & ARB’s sales. Clearly Australian growth has stalled. The growth of export sales is now critical in order to maintain any reasonable profit growth. The execution of the export sales piece will be very important to the share price. There are very few companies which have P/E’s similar to ARB & such relatively weak sales growth. In my opinion the current valuation does not support the current share price.