Share Code: ARH – Market Cap: R1.4bn – PE: 10.0x – DY: 3.8%
FY 16 – Performance Exceeded Our Expectations
- ARB Holding’s revenue grew by 16% to R2.49bn (FY 15: R2.15bn) while Gross Profit (GP) Margin compression in the Electrical Division from 24.1% in FY 15 to 22.0% was offset by Group efficiencies and led the Group to beat our HEPS expectation of 53.6cps by 11% to reach 59.7cps (FY 15: 51.7cps).
- This reflected 15% y/y HEPS growth and was matched by an equal hike in the dividends to 23.1cps (FY 15: 20.1cps).
- Another 10cps special dividend (FY 15: 10cps) was declared with further special dividends likely in the coming year or two.
Our Thoughts: Tough Trading Environment Unlikely to Abate
- We have marginally raised our expected FY 17E revenues for ARB Holdings to R2.8bn (previous forecast: R2.7bn).
- Despite this, we have lowered previously noted margin assumptions and see this margin squeeze continuing into at least FY 18E.
- Therefore we forecast FY 17E HEPS growth of 10% to 65.4cpscps (previously forecast: 64.9cps), though we note the high degree of forecast risk in the present economic environment (both to the downside due to the economy and the upside due to management initiatives and the potential for acquisitive activity).
Forecast, Valuation & Implied Return: Attractive Upside Potential
- We raise our fair value for ARH to 650ps (previously: 520cps) on an implied Price Earnings (PE) of 10.9x, which appears unreasonable against either ARH’s own history or the various comparatives in the market.
- Rolling our fair value forward at our CoE we arrive at a 12m TP of 762cps (previous 12m TP: 609cps), on a comfortable Exit PE of 11.6x, implying a 27% return.
- Key risks to the Group are unchanged from our original Initiation of Coverage.