ARB Earnings: Brand Equity Outside Australia Is Harder To Come By

Shares in ARB continue to screen as expensive following the release of worse-than-expected fiscal 2023 results. Net profit after tax, or NPAT, fell 28% on fiscal 2022 to AUD 88 million—10% below our forecast. While the 3% top-line decline was broadly as expected, the sharply higher cost base weighed on profitability more than we anticipated. We expect margin pressure to persist into next year and lower our fiscal 2024 NPAT forecast by 4% to AUD 102 million. Nevertheless, the reduction in our near-term earnings forecasts is broadly offset by the time value of money, and we maintain our AUD 24.50 fair value estimate.

The revenue decline was principally due to export markets, down 9%, which included the impact of restructuring of ARB’s major U.S. customer, 4 Wheel Parts, during the year. Original equipment manufacturer, or OEM, sales were down 19% amid weaker relevant vehicle sales and timing of contracts. Sales to the Australian aftermarket—the majority of revenue—bucked the trend, up 3% on fiscal 2022. The Australian aftermarket remains the jewel in ARB’s crown. ARB enjoys substantial brand strength in Australia, underpinning its narrow economic moat. By contrast, the OEM business is more exposed to volatility in new car sales. Products typically carry the OEM badge and lack the brand equity ARB has carved out in the aftermarket. Similarly, ARB has been unable to enjoy the same brand equity offshore—operating margins in Australia are about double that derived from the U.S.

Gross profit margin declined to 53%, from 56% in fiscal 2022, due to a sharp increase in materials and consumables—notably steel and freight. But input costs are moderating, and ARB has pushed through price increases. We expect price increases to stick in the Australian aftermarket. ARB has a proven history of commanding a price premium over its competitors. Its products are often highly conspicuous and consumers are willing to pay up for the perceived higher quality.