ARB: Interim result 2017

This 4-wheel drive parts manufacturer delivered a rare disappointment in its interim result, and we're almost getting excited.

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.

Table 1: ARB interim result
Six months to Dec ($m) 2016 2015* /(–)
Revenue 186.2 175.5 6
Profit before tax 32.2 29.8 8
Net profit 23.4 22.1 6
EPS (c 29.5 27.9 6
Interim div. 16c fully franked, up 10%,
ex date 6 April
* Underlying

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

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