ARB Corporation Limited (ASX:ARP) is Australia’s largest manufacturer and distributor of 4×4 accessories such as bull bars, canopies, tow bars and winches. ARB also has an international presence, with an office in the USA and an export network that extends through more than 100 countries around the globe.
The origins of ARB go back to 1975, when company founder, Tony Brown, was inspired by a Four Wheel Driving trip through the top end of Australia. During this trip, Tony recognised the need for durable, high quality equipment that would meet the vigorous demands of 4WD owners who undertook expeditions in the Australian outback.
Upon returning to his family home in Melbourne, Tony began working where many great businesses are founded (in his garage) to address some of the product deficiencies he’d encountered on his trip. And, so ARB, the initials of Anthony Ronald Brown, was founded.
Does this business have a sustainable competitive advantage?
One of ARB’s competitive advantages comes from its strong brand presence that spans more than 30 years in Australia and around the world.
A second competitive advantage is derived from the unique operation of the business. ARB:
– Designs their own product
– Manufactures their product to high quality standards
– Distributes their product globally
– Operates their own retail outlets (some of which are owned, and some franchised)
This control of the entire product cycle from a new concept through to retail sales enables the company to maintain an enviable position at the top of the 4WD accessories market.
What are the risks facing this business?
One risk to ARB is linked to the supply of 4WD vehicles around the world. A decline in the popularity for 4WD vehicles, perhaps as a result of increasing petrol prices over time, would naturally impact on sales for the company’s 4WD accessories.
Forecast for earnings growth in the 2014 financial year at this point appear to be slowing. We will be watching closely for a slowing in the rate of business growth.
Is it run by able and trustworthy management?
ARB has been managed with a family feel since inception. Tony Brown’s brother Roger Brown is Chairman with another brother Andrew Brown currently the Managing Director of the business.
Management in ARB demonstrated their capability when facing a difficult time in the previous financial year. Floods in Thailand impacted production at the company’s manufacturing plant together with the Japanese tsunami temporarily halting the supply of 4WD vehicles globally. Management appeared to handle the situation very professionally and provided regular communication to customers, employees and shareholders alike.
As at June 2012, the company is run with net cash to equity position of 22%. The cash on hand enables the company to fund the growth of its international distribution network and the opening of new stores organically. The company also generates positive cash flow in the neighbourhood of net profit levels.
Is it trading at a bargain price?
Like most quality merchandise, ARB’s share price is relatively expensive at present.
|Company||Code||Rank||2012 Actual Valuation||Today’s Share Price||Margin of Safety||2013 Forecast Valuation||2014 Forecast Valuation|
|ARB Corporation Limited||ARP||Gold 1||$8.05||$11.80||-23%||$9.61||$9.64|
*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.
In summary, ARB Corporation is a great business with the potential for many years of growth both domestically and internationally. The company has strong management and an equally strong balance sheet at present. The company produces consistent profit and good cash flow. The share price is both regularly and currently expensive compared to my estimate of value.
Disclosure: Dean Mico owns shares in ARB Corporation Limited.
This article is published by Dean Mico.
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