ARB: Home Is Where the Brand Is

Shares in ARB ARB are expensive compared with our unchanged AUD 24.50 fair value estimate. We think the market is overestimating ARB’s ability to replicate its Australian success offshore—particularly in the United States. We are yet to see evidence of the brand equity and retail price premium enjoyed in Australia translating to foreign markets. Revenue is up about 1% in the first quarter of fiscal 2024, with domestic aftermarket and original equipment manufacturer sales growth offset by an 8% decline in export sales. Despite largely flat revenue, aftertax profit was up about 10% on the previous corresponding period with improved gross margins and a mix shift to the more profitable domestic business. We make no change to our fiscal 2024 net profit after tax forecast of AUD 102 million—a 16% increase on fiscal 2023 as ARB cycles a relatively weaker second half.

As expected, profitability is improving. ARB noted gross margins have returned to roughly fiscal 2021 and 2022 levels (of about 56%) after declining to 53% in fiscal 2023 amid a sharp increase in materials and consumables, notably steel and freight. Input costs have moderated, and ARB has pushed through price increases. The firm has a proven history of commanding a price premium over its competitors. With highly conspicuous products and intangible brand assets in Australia which underpin its narrow economic moat, we think consumers are willing to pay more for the perceived higher quality.

While we also expect improvement in operating margins in fiscal 2024, we do not expect a return to record profitability in fiscal 2022 as extremely tight cost control during COVID-19 unwinds. We forecast a fiscal 2024 EBIT margin of about 20%, compared with 18% in fiscal 2023, lifting to around 22% over the medium term. We still expect longer-term margins to exceed prepandemic margins due to operating leverage from the higher revenue base and some cost-outs.