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$37.40 arb corporation limited.

Ann: Appendix 4E, Annual Report and Financial Statements, page-17

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MarsC

4,243 Posts.

455

17/08/17

09:58

Post #: 26553705

Originally posted by jg123456 ↑

First, some v. good posts on this board - the diversity of opinions is excellent and really appreciated. thanks very much all.

I think we can agree that ARB remains an excellent company, and excellently managed. Year after year this company delivers good performance with few surprises and seemingly minimal risk! But my first reaction was v. similar to Travelightor. I was still underwhelmed, esp. by the sales growth achieved. Yes, exports and OEM (to a lesser degree) was good, but looking at the australian market:
- The number of 4wds continues to increase in absolute terms - so more vehicles and owners to sell to (admittedly many would not want or need ARB accessories);
- ARB continues to develop more products and a broader range - so it can sell more gear per vehicle;
- ARB continues to increase distribution and build its brand - so should be able to reach more of the population more conveniently/confidently;
BUT Australian sale growth is insipid (with declining growth rates). Yes, I know the mining states are still in the doldrums (but that's now new news), yes there is consumer uncertainty (but new car sales were up 2% YoY, and SUV sales now account for 37.4 per cent of the market, up from 35.4 per cent in 2015 - ie, all of the market growth was in SUV), yes not all of the growth is in the segments which matter most to ARB, but I think that we can look for, and offer, excuses for why ARB's growth is better; but really the company could do better. all IMHO.

re: the deteriorating ROE. Madamswer's analysis is very useful, and I agree with Madamswer's conclusions. I break -down the historical ROE into NPAT margins, revenue/capital employed and capital employed/equity (a la du pont). The results from 1998 to 2017 are summarised in the table below.

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9 Column 10 Column 11 Column 12 Column 13 Column 14 Column 15 Column 16 Column 17 Column 18 Column 19 Column 20 Column 21 Column 22 Column 23 Column 24 Column 25 Column 26 Column 27 Column 28 Column 29 Column 30 Column 31 Column 32 Column 33 Column 34 Column 35 Column 36 Column 37 Column 38 Column 39 Column 40 Column 41 Column 42 Column 43 Column 44 Column 45 Column 46 Column 47 Column 48 Column 49 Column 50 Column 51 Column 52 Column 53 Column 54 Column 55 Column 56 Column 57 Column 58 Column 59 Column 60 Column 61 Column 62 Column 63 Column 64 Column 65 Column 66 Column 67 Column 68 Column 69 Column 70 Column 71 Column 72 Column 73 Column 74 Column 75 Column 76 Column 77 Column 78 Column 79 Column 80 Column 81 Column 82 Column 83 Column 84 Column 85

1

Column 1

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | [/table]
| ROE| NP / R| R / CE| CE / E1998| #DIV/0!| 8.0%| 209%| #DIV/0!1999| #DIV/0!| 7.9%| 194%| #DIV/0!2000| 22.2%| 8.7%| 205%| 124.5%2001| 24.2%| 9.6%| 215%| 117.9%2002| 26.1%| 10.5%| 235%| 106.2%2003| 27.5%| 11.6%| 215%| 110.5%2004| 27.3%| 12.0%| 211%| 107.9%2005| 24.5%| 11.2%| 170%| 129.4%2006| 21.8%| 10.6%| 193%| 107.0%2007| 22.9%| 10.7%| 194%| 110.0%2008| 25.3%| 11.3%| 201%| 111.4%2009| 24.5%| 11.7%| 212%| 98.6%2010| 29.5%| 14.4%| 252%| 81.2%2011| 29.3%| 14.9%| 258%| 76.3%2012| 25.5%| 14.3%| 228%| 78.0%2013| 23.9%| 14.5%| 218%| 75.4%2014| 22.1%| 14.7%| 187%| 80.4%2015| 19.9%| 13.6%| 151%| 96.4%2016| 19.5%| 13.6%| 151%| 94.5%2017| 18.5%| 13.2%| 156%| 89.8%[/table]
[/table]

As Madamswer notes, margins remain strong, the decline in ROE is largely due to (i) ARB generating less revenue per dollar of capital and (ii) less use of debt (surplus cash at the moment). The latter I'm unconcerned with - but the declining revenue per dollar of capital employed is more concerning. The segments analysis in today's results shows that there is not a lot of fixed capital investment into the overseas segments (excl Thailand which is essentially a manufg operation). Ie, in both of the last two years the fixed capital into USA and Middle East / Europe was less than $1m in total. But the total assets grew much more strongly - presumably working capital investment as Madamswer identifies (as FX impact on fixed capital was minimal (per note 10)).

I think I define net working capital / revenue differently form Madamswer. Ie, I exclude cash and short term borrowings - which I include in net debt. But comparing Net working capital / revenue over time highlights the adverse trends here. See the Table below. The last two columns show inventory as a % of sales, and receivables as a % of sales. The increase in NWC is clearly due to growing inventories per dollar of revenue. It is a very interesting question whether this is the cost of: i. growing the Aust. distribution network (more sales outlets requiring stock); ii. growing global sales; iii insufficient warehousing requiring stores to carry more stock; and/or iv. a larger and more diverse product offer (more SKUs coupled with efficient manufg runs requiring more stock to be held). ??? If there is good news, is that the ratio declined in the 2017 result hence the v. good FCF generation in FY17. But can it be maintained/improved?

Column 1 Column 2 Column 3 Column 4 Column 5 Column 6 Column 7 Column 8 Column 9 Column 10 Column 11 Column 12 Column 13 Column 14 Column 15 Column 16 Column 17 Column 18 Column 19 Column 20 Column 21 Column 22 Column 23 Column 24 Column 25 Column 26 Column 27 Column 28 Column 29 Column 30 Column 31 Column 32 Column 33 Column 34 Column 35 Column 36 Column 37 Column 38 Column 39 Column 40 Column 41 Column 42 Column 43 Column 44 Column 45 Column 46 Column 47 Column 48 Column 49 Column 50 Column 51 Column 52 Column 53 Column 54 Column 55 Column 56 Column 57 Column 58

1

Column 1

| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | [/table]
| NWC| Invty| Rcvbles| As % of revs| As % of revs| As % of revs| | | 2002| 12.6%| 15.6%| 15.0%2003| 13.9%| 15.3%| 13.3%2004| 15.1%| 17.7%| 14.6%2005| 17.3%| 16.9%| 16.8%2006| 19.3%| 17.7%| 17.3%2007| 21.6%| 19.4%| 17.3%2008| 20.9%| 18.9%| 16.2%2009| 19.8%| 18.5%| 14.5%2010| 15.4%| 17.7%| 13.9%2011| 15.4%| 16.6%| 12.5%2012| 19.3%| 18.9%| 13.8%2013| 19.0%| 20.1%| 12.7%2014| 23.0%| 23.7%| 13.4%2015| 25.2%| 23.6%| 12.8%2016| 26.3%| 24.4%| 12.4%2017| 24.0%| 23.0%| 13.3%[/table]
[/table]

yours etc
a happy (but demanding) long term holder!

Expand

@jg123456

I think you are being way too harsh. Have a look at the graph of ARB annual revenues below.
ARB_rev.pdf

Do you see a "hump" in domestic aftermarket revenues between the financial years 2009 and 2014? Whilst a hump may lead to exciting and unsustainably high growth on the way up, it must do the opposite on the way down.

It's now getting back to a more "normal" long term trend, it would appear (to me anyway). What more can we ask for? The last thing I want is for ARB to start chasing profitless growth by chasing the "tempting" mass market that is the "Toorak tractor". That would be stepping out of its moat - not with my capital thank you very much.

So I'm with @madamswer on this one - rose tinted glasses or not.

Last edited by MarsC: 17/08/17

ARB Price at posting: $16.47 Sentiment: Hold Disclosure: Held

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