I was just preparing a note for my clients
(NOTE THIS IS NOT INVESTMENT ADVICE/DYOR)
This morning ARB Corporation Ltd (ASX:ARB) announced the acquisition of UK based Autostyling Truckman Group Limited which trades as Truckman. The company is the leading manufacturer and distributor of utility accessories in the United Kingdom focused on rear of vehicle products such as canopies, bed lines and general utility vehicle products. According to the announcement Truckman is the industry recognized brand leader in the United Kingdom. The Truckman business is based at a 4,860m2 office and distribution hub in Birmingham and currently employees 80 staff. ARB has said it will retain all existing staff and management with business to continue as usual with ARB’s support. The price was £21.9m including £10m payable on completion, deferred payments of £4m and a further amount of £7.9m subject to performance hurdles over the next three years. Purchase has been funded by cash reserves with the business expected to operate profitable from the commencement of ARB ownership from the 2nd of March 2021.
Attempting to work out the value in the deal is made somewhat difficult by the fact that the most recent public filings from Truckman available on UK Companies House is from the period ended August 2019. At that time Truckman reported
§Revenue: £17,832,681
§Gross Profit: £4,744,234
§EBIT: £1,971,225
§EBITDA: £4,001,295
§NPAT £1,641,651
Even adjusted for currency these numbers are a drop in the ocean compared to revenues and profits enjoyed by ARB in FY20.
Still, assuming the maximum purchase price of £21.9m this leads to an acquisition multiple of 1.22x 2019 revenue or 5.47 x 2019 EBITDA. Data we could find from UK firm Robot Mascot/Equidam reports that the avg. EBITDA multiple for July 2020 for Auto, Truck and Motorcycle parts, and retailers of the same to be between 7.08 and 12.09x. In our view ARB’s maximum acquisition cost appears to be to on the low-fair end of the scale.
Truckman had experienced shaky revenue up until 2019 which have not been explained because of limited on private company filings in the UK. Similarly trying to estimate its performance during FY20 is difficult. While ARB has benefitted greatly from the boom in 4X4 and general consumer activity during the year it may not be the same for the UK and Europe which have had far more severe lockdowns sustained for longer.
We note several similarities between the business of Truckman and the acquisition of New Zealand based Proform plastics whose products ARB had previously sold. The model range provided by Truckman is similar to ARB’s both in terms of aftermarket and OEM products. At a glance there may even be opportunities for ARB to use its own store network to expand its range to other vehicles, such as the Mercedes X-Class and Volkswagen Amarok.
Source:Truckman.co.uk
We believe that the acquisition of Truckman appears to be well priced and fits within ARB’s current strategy. ARB management has been forthcoming about their plans to pursue a more direct sales model, mainly by purchasing existing retailers and turning them into company stores. Our preliminary research into Truckman suggests they have employed a direct sales model shipping their products straight to customers.
We suspect that Truckman may have also enjoyed a bumper year in 2020 based on media reports in which the company stated that it had invested in additional warehousing and distribution space at its headquarters. (e.g. https://www.expressandstar.com/news/business/2021/03/02/demand-for-hardtops-drives-truckmans-expansion/)
Based on the above figures from Truckman filings in the UK and ARB’s shares outstanding we roughly estimate that Truckman will add ~2 cents per share to ARBs reported earnings (assuming 2019 performance). We suspect that this is why ARB’s announcement this morning said that the business is ‘expected to operate profitably’ from the commencement of ownership but stopped short of using the magic words of ‘EPS/earnings accretive’.
ARBs most recent report showed signs of strength in Europe but like the rest of its operation carries the caveat that the strong performance in 2020 is unlikely to be repeated. Still we believe that the acquisition creates the following possible benefits:
§Strong foothold for roll-out of direct sales model in the UK,
§Potential for cost synergies with existing European operations (currently based in the Czech Republic),
§Potential to improve production, distribution and retail processes for existing Truckman product range,
§Potential to expand ARB global product range through products sold by Truckman which aren’t sold by ARB,
§Potential to improve margin on Truckman products through ARB manufacturing expertise and infrastructure (i.e. offshore manufacture in Thailand),
Personal note: overall I think it looks pretty good while it will take time for benefits to show through, biggest nearside risk for ARB is a change in comps to the COVID-19 boom period potentially meaning revenue growth etc slow. Truckman small size means that ARBs stellar gross margin is unlikely to be hit too hard (IMO) when it next reports.
Valuation still a bit pricey.
GLTAH!
(20min delay)