Depending how you look at it, ARB Corporation’s interim result last month was either somewhat disappointing or highly gratifying. On the one hand, revenue rose only 6.1% compared to forecasts of a couple of per cent more; on the other hand, it has caused the share price to fall around 6%.
Australian Aftermarket sales (which contribute 68% of the total) grew a modest 5.0%, with above-average sales in Victoria and NSW offsetting a flat performance elsewhere and a decline in Western Australia. The performance was also affected by wage negotiations at the company’s factory in Thailand, which ‘severely disrupted' production in November and December.
|Six months to Dec ($m)||2016||2015*|| /(–)
|Profit before tax||32.2||29.8||8|
|Interim div.||16c fully franked, up 10%,
ex date 6 April
Exports (25% of the total) grew 12.1%, helped by the new sales and distribution facility in Dubai, which began operating in June 2016 and ‘is already providing useful sales’.
Original equipment sales direct to vehicle manufacturers (7% of the total) fell 2% – which is somewhat worse than management’s forecast last August that growth would slow from the 12.2% achieved in 2016. The company is ‘working on a number of new contracts’ with original equipment manufacturers (OEMs) that should improve sales in this category in the 2018 financial year.
A slight improvement in the operating margin, from 17.0% to 17.3%, meant that pre-tax profit grew 8.2%. This was offset by a higher tax rate – due to a higher proportion of profits being earned in higher-tax countries – so that net profit only rose by 5.6%. Management expects the tax rate to 'moderate’ in the second half.
Operating cash flow of $28m was almost double its level in the first half of the 2016 year, but slightly lower than the $30m seen in the second half of 2016. The first half of 2016 was affected by a $13m increase in inventories due to warehouse expansion and the introduction of new products; $4m of that was unwound in the second half of 2016, while the first half of 2017 saw a $1m increase.
Capital expenditure jumped to $16m – the same as was spent for the 2016 full year – as the company continued to work on its new warehouse in Keysborough, Victoria. As a result, free cash flow was just $12m, or about half of net profit. As we explained in ARB shifts back into gear on 26 Sep 16 (Hold – $18.07), though, ARB has a fantastic track record and we’re more than happy to see it investing.
There are few stocks we’d relish buying more than ARB and, with the price now down 19% since our September update, we’re daring to dream. For the time being, though, we continue to recommend that you HOLD.