Ann: Appendix 4E, Annual Report and Financial Statements, page-10

"Another steady as she goes kind of result from ARB. Nothing to get excited about.
On to the negatives:
- The current trend of decreasing profitability margins continues
- The current trend of decreasing ROE, ROIC also continues
- Stock turnover ratio also continues to go down"


@travelightor,

At the risk of coming across as sporting the most rose-tinted of spectacles, unlike you, I actually did get quite excited by this result, because I found this to be one of ARB's better results for some years, against the backdrop of a sluggish business environment.

For one thing, the JH2017 result represented the fastest rate of EBIT growth since 2012, which was the tail end of the heady commodity boom days:

Half-Yearly EBIT growth (% change on pcp):
DH02: +14
JH03: +32
DH03: +18
JH04: -1
DH04: +21
JH05: +26
DH05: +1
JH06: -5
DH06: +18
JH07: +15
DH07: +20
JH08: +34
DH08: +14
JH09: +11
DH09: +39
JH10: +41
DH10: +18
JH11: +11
DH11: +1
JH12: +4
DH12: +13
JH13: +7
DH13: -5
JH14: +3
DH14: +3
JH15: +7
DH15: +7
JH16: +1
DH16: +7.8
JH17: +8.4


As for your reference to the "current trend of decreasing profitability margins and ROE", while that might be true over the past few years, that period compares with a period characterised by the very buoyant mining and infrastructure boom between 2008 to 2012.

But, if you isolate that super-normal period for what it was, ARB's margins are today still higher than they were before the boom (i.e., 2002 to 2007), which is a period that is far more representative of market conditions similar to those ARB is experiencing today.

ARB's EBIT Margin:
2002: 15.3%
2003: 16.7%
2004: 15.8%
2005: 17.1%
2006: 15.3%
2007: 15.4%
2008: 16.6%
2009: 16.7%
2010: 19.6%
2011: 20.2%
2012: 19.7%
2013: 19.9%
2014: 19.2%
2015: 18.3%
2016: 17.5%
2017: 17.6%


And, sure, ROE's have contracted, but part of the reason for that is the physical inevitability of longer and wider supply chains as the company has grown globally (Working Capital-to-Sales today runs at around 28%/29%, whereas in the pre-commodity boom period, when the company's Revenues were a quarter of current levels and when it was far less internationally represented, Working Capital-to-Sales was below 20%). That's a lot of additional capital that has needed to be invested in the distribution pipeline ... around $32m, I calculate, based on current levels of Sales.

Another reason for the ROE fade is self-inflicted due to the fact that the company is now run with a significant cash balance (Net cash holdings today are equivalent to more than half of the level of annual Net Profit), whereas a decade ago it was partly debt-funded.

If the company could somehow get working capital down to historical levels as a percentage of Sales, and then it returned that liberated capital (it would amount to around $32m, I estimate) along with $27m of existing cash, to shareholders, the result would be a 20%-25% reduction in Shareholder Equity, to around $215m.

Applying last year's $49m of NPAT to that adjusted Shareholder Equity figure, yields an ROE of ~23% [*], which is in the same ball park as the previous similar period in the cycle (i.e., 2004/5/6/7, when ROE 's were, respectively, 25%, 26%, 21% and 24%)

So, in terms of the current performance of the business in the context of its potential, based on historical precedent, on that score I am decidedly more "glass half-full" than you seem to be.

Valuation-wise, on the other hand, there I am far less enthused.

In fact, on that matter, I am scratching my head in bemusement.
(As I have done for what feels like my entire investing life.)



([*] compared to the 18.4% figure, as per the actual reported results)