ARB Corp: Interim result 2013

Going up against a period affected by supply disruptions from the Japanese Tsunami and flooding in Thailand, ARB Corporation’s first-half was always going to look pretty good. But in the event, it's somewhat underwhelming.

Net profit growth of 14.5% (to $20.9m) and revenue growth of 10.0% (to $147.1m) are healthy figures. But they’re only around the 10-year averages for this company, of 16% and 13% respectively, so they hardly make up for the growth of only 2% each seen in the first half of the 2012 financial year.

Earnings per share followed net profit up 14.5%, to 28.8 cents, from which a fully franked dividend of 12.5 cents will be paid (up 13.6%).

Hitting capacity

Management cited the high Australian dollar and capacity constraints in the local market as negative factors.

The high Australian dollar is not something the company can control, although it can mitigate its effects by diversifying its cost base, as it has done in the past by building the factory in Thailand. Perhaps it’s time to build a factory in the US, which might also alleviate the capacity constraints.

As it stands, management noted in today’s results announcement that construction of a warehouse and factory were completed in Thailand during the half and that further investments were being made in Australia and Thailand in order to increase capacity. This explains the uptick in capital expenditure during the half to $7.7m, compared to $4.7m in the first half of 2012, and the 7% fall in free cash flow to $10.7m. But ARB makes very high returns on capital employed (of about 42% in 2012) and we're pleased to see it making the necessary investments.

Mining slowdown

The bigger worry is that the mining slowdown may be having an effect. That’s not necessarily a concern in itself, but it might suggest that the company’s excellent performance in recent years may have been helped by some significant tailwinds. Those tailwinds may, in turn, have been baked into a share price which, on a price-earnings ratio of nearly 20 times forecast earnings, looks pretty steep for a manufacturing company.

The stock is up 16% since 24 Oct 12 (Hold – $10.71), taking it past the relevant trigger in our price guide, but we're very reluctant to let go of such a high quality company, so we're cutting it a little more slack and edging up our price guides.

The stock is, however, on watch for a potential downgrade should the price get too much higher or the long-term growth prospects show signs of faltering. Note also our 5% recommended maximum portfolio weighting: if your holding is much beyond that it might make sense to take some money of the table now.

Note: The model Growth portfolio owns shares in ARB Corp.