"Another steady as she goes kind of result from ARB. Nothing to...

"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)