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.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | [/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?
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| 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!
(20min delay)