Thanks,
@gragou02It certainly reads like a management team that thinks strategically about the business in terms of where it is going to be in the next 10 years, as opposed to just the next 10 months.
But I have to say, in the past two or three years ARB has become a far more convoluted and uncertain investment proposition for me than at any time in the preceding decade-plus over which I've been a shareholder.
At any time before say, 2020, I could set my watch to the sorts of earnings numbers ARB produced each year, such was its consistency.
However, today - coming off the acute distortions caused by Covid and its effect of bringing forward of demand for ARB products - I find it difficult to forecast the current normalised earnings base for the company.
Using EBIT as a proxy of earnings, the chart below highlights the sheer extent of the distortions:
View attachment 5408473Prior to 2020, ARB's earnings were rising inexorably in a consistent manner, and were on track to exceed $80m (represented by the grey bars), when Covid happened, dampening the 2020 result, but then tidal wave of government stimulus during 2021 and 2022 sent ARB's earnings into the stratosphere (light blue bars).
This was clearly unsustainable (even though the market, in its infinite wisdom, still capitalised those super-normal earnings into the valuation of the company at the time), and in DH2022 EBIT contracted by 30%. Despite the commissioning of the new Thai factory in December 2022, I suspect further pull-back in EBIT in JH2023 (given we are cycling a still-elevated pcp), albeit the fall will not be not the same extent as DH2022 on DH2021; so somewhere between 5% and 10% would not come as a surprise.
That would leave FY2023 EBIT somewhere between $130m and $140m (the dark blue bar).
The question is whether or not that number is the new earnings base for the business. If it turns out to be the case then the prospective valuation metrics look as follows:
EV/EBIT = ~17.0x
EV/EBITDA = ~14.5x
P/E = ~25x
Which, while not bargain-basement stuff, I can live with given the nature of the company.
But the important caveat being that is if FY2023 does indeed represent a base to earnings.
And the problem I have is that - because of all the moving parts (cycling Covid-assisted earnings, tighter monetary conditions constraining consumer spending, scaling up new factory, OEM sales traction) - ARB is no longer the straightforward and predictable investment proposition that it was a few years ago.
I have little doubt that - in 5 or so years' time - ARB's earnings will be higher than they are today. The problem is that I am struggling to establish what today's starting base is.
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(20min delay)