While sales improved in the December quarter, a depreciating Australian dollar versus the Thai baht means
-Domestic sales appear broadly stable
-Sales growth should be supported by new product launches
-Earnings margins expected to decline in the second half
Automotive component supplier
While sales growth improved in the second quarter, this was more than offset by the headwinds to margins, and the company's latest net profit guidance of
Credit Suisse observes the stock has generally withstood profit warnings quite well in the past, and there are some positives that could drive a return to earnings growth if these indeed materialise, including a recovery in sports utility vehicles and 4WD sales, a reversal of the strength in the Thai baht and/or a game-changing acquisition.
There is a strong track record of earnings growth,
ARB has confirmed first half sales growth of 7.1%, an acceleration from the 5% growth posted in the first quarter. This suggests to Wilsons domestic sales are broadly stable despite a softening in the 4WD segment of new vehicle sales. It also points to stronger sales growth in export markets.
Wilsons was encouraged by the sales growth in the second quarter and expects this should be supported by new products to be launched in
The valuation is sufficiently attractive to support an Overweight rating and the broker, not one of the seven stockbrokers monitored daily on the FNArena database, has a
Credit Suisse suspects the stock will be range-bound, pointing out the company has incrementally pushed more production into
OEM Growth
Citi points out prices increased by 2.5% in the first half which could have helped sales growth accelerate in the second quarter. The broker expects sales growth will continue improving as original equipment manufacturer (OEM) sales are likely to be underpinned by new contracts and the renewal of existing contracts.
Exports may also benefit from the lower Australian dollar. Nevertheless earnings (EBIT) margins in the second half are expected to decline to 15.5% because of the currency depreciation and an increase in OEM sales, which have lower gross margins. Subsequently, Citi expects margins will expand over FY21 and FY22 driven by increasing scale in offshore markets and efficiency gains from the new Thai warehouse.
Citi expects ARB is able to drive medium-term earnings growth because of an increasing consumer preference towards sports utility vehicles and 4WD. There are also potentially new opportunities from OEMs.
See also, ARB Corp Decelerates on
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