New US Engineering Center And Toyota Partnership Will Boost Future Market Position

Key Takeaways

• Strategic U.S. distribution expansion and engineering center establish ARB for long-term revenue growth and enhanced market adaptability.
  
• Partnerships and product line expansions aim to bolster export revenues and offset investment costs, enhancing profit margins and positioning.
  
• ARB faces revenue and profit challenges from weak vehicle sales, rising costs, acquisition impacts, and forex risks with a weak Australian dollar.

Catalysts

Engages in the design, manufacture, distribution, and sale of motor vehicle accessories and light metal engineering works.

• ARB's strategic investments in expanding its U.S. distribution network, particularly through increasing its stake in Off Road Warehouse (ORW) and the acquisition of 4 Wheel Parts’ 42 retail stores, are expected to drive significant long-term brand and sales growth across the U.S., positively impacting revenue and earnings.
  
• The establishment of a new engineering center in California dedicated to U.S. applications is anticipated to boost product development and speed to market, enabling ARB to better cater to the North American market and potentially increasing revenue growth and improving profit margins.
  
• The ongoing partnership with Toyota USA, including the newly launched Trailhunter program, positions ARB for increased sales through OEM channels, which is expected to bolster export revenues and potentially improve net margins due to the high-profile association with a leading OEM.
  
• Expansion of ARB’s product line, such as the U.S.-ready version of the Earth Camper, is likely to open new revenue streams and strengthen market presence in key international markets, contributing to future sales growth and enhanced market positioning.
  
• Despite increased costs due to strategic investments and higher employee expenses, management’s confidence in covering these through future growth initiatives, such as the establishment of new sales channels and expanded product offerings, suggests an anticipated improvement in operating profit and earnings in the medium to long term.

ARB Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ARB's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.2% today to 15.0% in 3 years time.
• Analysts expect earnings to reach A$133.9 million (and earnings per share of A$1.62) by about March 2028, up from A$102.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$115.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.4x on those 2028 earnings, up from 27.2x today. This future PE is greater than the current PE for the AU Auto Components industry at 20.4x.
• Analysts expect the number of shares outstanding to grow by 0.82% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.07%, as per the Simply Wall St company report.

ARB Future Earnings Per Share Growth

Risks

• The challenging global environment, including a decline in new vehicle sales and constrained consumer discretionary spending, may negatively impact ARB's revenue growth, especially as these factors contribute to weaker demand in the market.
  
• ARB's increase in employee costs, which grew by 18.1%, represents a significant rise in operating expenses without immediate proportional revenue growth, affecting net margins.
  
• The acquisition-related costs and losses from the integration of new businesses such as ORW and 4 Wheel Parts, which initially incurred transaction costs, could adversely influence ARB's profitability and earnings as these businesses stabilize post-acquisition.
  
• Declines in sales of ARB's original equipment manufacturer customers due to a decrease in new vehicle sales, could result in pressure on revenue streams from this segment despite past growth achievements.
  
• ARB's exposure to forex risks due to its inventory costs being denominated in foreign currencies, combined with the weakening Australian dollar and minimal forward currency positions, poses a threat to future profit margins.

Valuation

• The analysts have a consensus price target of A$38.97 for ARB based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$49.12, and the most bearish reporting a price target of just A$27.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$892.2 million, earnings will come to A$133.9 million, and it would be trading on a PE ratio of 30.4x, assuming you use a discount rate of 7.1%.
• Given the current share price of A$33.49, the analyst price target of A$38.97 is 14.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.