ARB Corporation (ASX:ARB) riding high on pent-up demand for Four-wheel drive parts

Summary

  • Automobile accessories market has gradually becoming bigger than ever.
  • Car sales crashed to three decades low due to the lockdown and the aftermarket accessories manufacturers took a direct hit from the tanked sales of cars.
  • The demand pickup is the need of the hour for the aftermarket accessories industry to revive and get back on its feet.
  • One company which has started to see gradual demand pickup is ARB Corporation Limited (ASX:ARB).
  • ARB reported its unaudited sales revenue growth of 17.7% in the quarter ended 30th September 2020.
  • The immediate demand coming during the holiday quarter can benefit the overall economic stability, but the pandemic is not over yet, and the situation needs to be monitored closely.

While the pandemic delivered huge blow to the automobile and related accessories industry, gradual demand pick-up seems crucial for the revival of the industry. Latest quarterly results of ASX Listed ARB Corporation Limited (ASX: ARB), engaged in manufacturing, distribution and sale of four-wheel drive motor vehicle accessories, is under the spotlight owing to attractive revenue numbers during the September quarter.

The demand revival was seen on the back of decent export scenario, increased trend towards local touring and spending revival supported by government aids.

ARB shares have delivered a return of ~58% over the last three months, trading at $30.190 mid-day on 8 October 2020.

Aftermarket accessories – A Sneak peak

There was a time when people would go to a dealer, buy a car off the lot and drive back home without any modifications or customisations. The cars were being sold in their stock configurations as they came off the factory.

But from a few years back, we are seeing a paradigm shift in the customers preference to make their vehicles more customised and personal while enhancing some of the existing capabilities. Now enthusiasts want better suspension for increased off-roading capability from their SUV or LED headlights for better visibility at night. A portable fridge or a luggage carrier on the roof might come in handy on a family trip. The accessories market caters to these needs and is gradually becoming bigger than ever.

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This burgeoning opportunity has been spotted by the manufacturers who have started to provide their in-home solutions for providing these performance and appearance enhancing accessories. But as the gold kept in an open space is seen by all, a lot of players are coming in to provide their own aftermarket accessories with their own brand names. Some are even tying up with the manufacturers as OEMs (Original Equipment Manufacturers).

Impact of Coronavirus pandemic

As no sector and no economy has been spared by the Coronavirus, the same is the case with the aftermarket accessories industry. With the physical movement of people dropping considerably, car sales crashed to three decades low due to the lockdown and the aftermarket accessories manufacturers took a direct hit from tanked sales of cars.

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The auto workshops which are a major part of this industry pertaining to aftermarket accessories have also been hit hard with 3% of the service and repair workshops reporting a decrease in the revenue and 50% experiencing a downturn of more than 30%, according to the Australian Automotive Aftermarket Association (AAAA).

The government has been trying to keep businesses afloat by providing relief packages or monetary stimulus to sail through the tough times. But the demand pickup is the need of the hour for the industry to revive and get back on its feet.

ARB’S Wide portfolio picking up demand

One company which has started to see gradual demand pickup in its numbers is ARB Corporation Limited (ASX: ARB). ARB is a well-recognized name in the aftermarket accessories for 4 wheelers and has been in existence since 1975.

The wide product portfolio of the company includes:

  • Bull Bars: It is used to provide extra protection to the vulnerable mechanical parts, and at the same time provides a base for mounting other accessories.
  • Portable Fridge/freezer: These freezers offer temperature range from -22 degrees to + 10 degrees Celsius with the additional portability feature.
  • Safari Snorkels: These are dedicated air intake systems designed to provide increased airflow to the vehicle airbox.
  • Dual battery and Solar system: They are independent and sustainable power sources which are an essential part of any campaign kit.
  • Long-range fuel tanks: A resilient cross-linked polymer or steel container, offering strength, rigidity and significant weight reduction.

Sales revenue is picking up

In the recent ASX filing on 7th October 2020, the company reported its unaudited sales revenue growth of 17.7% in the quarter ended 30th September 2020, over the previous corresponding period. The major chunk of growth came from the export market while domestic sales were moderate primarily due to the extended lockdown in Melbourne.

The company is figuring out some logistical difficulties to increase production and reduce the outstanding orders.

The recent sales growth has been achieved due to pent up demand and government stimulus; therefore, it should not be looked upon as an indicator for the future. The future is still uncertain, and the company has refrained from putting out any guidance for the remaining financial year.

The rough time during the pandemic

The company clearly agrees to the fact that the pandemic and the measures taken by the government to restrict the movement has impacted the business a lot which is even difficult to quantify. With the focus on health and safety, the company has adopted measures like social distancing, temperature checking on arrival, limited on-site access to non-employees etc.

With the enforced shutdowns across the key markets, including New Zealand, Thailand, Europe etc. the sales started to nosedive rapidly from around the world, and by April it totally collapsed due to escalating uncertainty. But gradually the demand started to pick up during May 2020, and during the next two consecutive months, the company recorded its record sales.

During the pandemic, the company had to go an extra mile in order to minimize the financial damage.

Holiday Rush kicking in

The entire year has been a challenging one from consumer confidence standpoint, but as October has come up, things have started to look better from here. It is that time of the year when online searches for Christmas, consumer’s favoured products etc. start to go up and continue to rise till the year-end.

Note: On the X axis, the time period of last 1 year is depicted and Y axis represents search interest relative to the highest point on the chart for the given region and time

The above chart shows the google search results for the term “Christmas Shopping” in Australia for a period of 1 year. As clearly seen, from the start of October 2019, the search for Christmas grew exponentially, showing the growing enthusiasm of customers during the holiday season till the year-end.

It's clear that consumers want to have a warm and delightful Christmas, which is the primary reason behind the demand pickup in the last quarter. The consumers are already factoring in the delivery delays, sold out stock due to lower manufacturing which could work as a catalyst for retail sales across the board.

Bottomline

Although the sales have started to pick up for ARB mainly due to the pent-up demand during the pandemic and the coming holiday season, the future is still uncertain.

The immediate demand coming during the quarter can benefit the overall economic stability, but the pandemic is not over yet, and the situation needs to be monitored closely.

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