This morning, ARB Corporation Limited (ASX: ARB) provided a strong set of half-yearly (HY21) results for FY21. Will this rev up the ARB share price?
ARB is Australia’s largest manufacturer and distributor of 4×4 vehicle accessories. It derives a majority of its revenue from Australia but also overseas from regions including the USA, Thailand, the Middle East and Europe.
ARB sales keep growing
ARB managed to achieve the top end of its earnings guidance released on 12 January 2021, recording profit before tax of $72.1 million for HY21. This equated to a big jump of 109.6% relative to the prior corresponding period, HY20 (PCP).
The rise in sales played a big part in bumping up ARB’s profit before tax. Sales surged by 21.6% over the PCP with growth across all regions of the business. ARB noted it was able to achieve this despite a 3.4% decline in sales of new vehicles in its target market, including medium to large SUVs and four-wheel drive utilities.
Sales to original equipment manufacturers bounced back from a 12.9% decline in the prior financial year (FY20) to an increase of 22.6% over HY21.
New product released
During the half, ARB released its new BASE roof rack, which has a lightweight design offering greater flexibility to personalise the overall set-up. The company notes this product has been very well received in both domestic and international markets.
ARB advises the engineering team is working on numerous long-term product development projects, some of which will be released to the market during 2021.
Lower payout ratio in the name of future growth
ARB has declared an interim fully franked dividend of 29.0 cents per share compared to 18.5 cents per share in HY20. This represents a payout ratio of 43%, which is below ARB’s historical payout of between 53% and 53% over the last five years.
ARB decided to carry this out to allow the company to strengthen its business for future growth.
Nonetheless, the interim dividend is more than 50% higher than the PCP, and means ARB shares trade on an annualised dividend yield of ~1.5%.
Management outlook
The board appears optimistic about the short-term in light of a strong customer order book and a return to growth in new car sales in Australia over the past few months. In saying that, management also remains cautious of the uncertainty in the global economic environment, so decided against providing guidance on the full-year outlook.
ARB management believes its strong brands around the world, highly capable team, a strong balance sheet and current growth strategies places it well to achieve on-going success.
My thoughts
ARB seems like your brand new four-wheel-drive: it’s big, reliable, and versatile. What I’m getting at is that ARB has become somewhat of a stalwart, recording steady growth in sales, maintaining consistent levels of expenses and paying dividends.
It seems like a brand new vehicle because ARB’s recent growth prospects make it appealing. However, it appears this growth was due to the increase in discretionary spending as a result of the COVID government stimulus and the border lockdown forcing people to find alternative ways to relax.
It’s difficult to say when the border will open but if and when it does open, ARB’s sales growth will likely taper off.
The capital intensive nature of ARB’s business also makes it challenging to improve operating margins, particularly when it’s focusing on numerous long-term product development projects.
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