ARB: Australian Aftermarket Remains Key Amid Sliding Export Sales

We maintain our AUD 24.50 fair value estimate for shares in ARB ARB following a trading update. For the nine months to March 2023, revenue contracted 4% to AUD 502 million compared with the prior corresponding period, or pcp. Revenue declines are decelerating. Compared with the pcp, revenue contracted about 5% in the first half of fiscal 2023, implying a revenue decline of less than 3% in the third quarter. We lower our fiscal 2023 revenue forecast by 2% to AUD 677 million—a contraction of about 3% compared with fiscal 2022. But the downgrade is immaterial to our fair value estimate, and shares in ARB continue to screen expensive.

While Australian aftermarket—the majority of ARB’s earnings—continues to grow, the original equipment manufacturer, or OEM, and export businesses remain challenged. Our narrow economic moat for ARB is underpinned by the strong brand position it has carved out in the Australian aftermarket. In the OEM business, which is more highly exposed to volatility in new car sales, products typically carry the OEM brand and lack the brand equity ARB has carved in aftermarket. Similarly, ARB has been unable to enjoy the same pricing premium offshore—operating margins in Australia are about double that derived from the U.S. Compared with the pcp, Australian aftermarket sales lifted about 4% year-to-March, contrasting with an 11% drop in export revenue and 26% fall in OEM sales.

We expect a more subdued demand environment. Beyond the funnel of new vehicle sales, demand for discretionary automotive accessories can be highly volatile amid challenging economic environments. Aggressive rate hikes from the Reserve Bank of Australia and rising cost of living pressures are biting, and we expect demand to ease as consumers prioritise consumer necessities like food and housing expenses over discretionary new car sales and accessories. We forecast Australian new vehicle sales volumes growing by about 2% through calendar 2023.