Share Code: ARH – Market Cap: R1.0bn – PE: 6.4x – DY: 0.0%

H1:21 – Strong Beat

• ARB Holdings published an excellent H1:21 result showing good revenue growth and particularly strong profit growth from key cost-savings measures annualizing across the period.
• Revenue rose +5% y/y, Operating Profit shot up +59% y/y (thoroughly beating our expectations), & HEPS grew +26% to 41.1cps (H1:20 – 32.6cps).
• For a Group that typically generates strong cash flows, cash generation was particularly strong over this period and the Group’s balance sheet remains very much ungeared.

Our Thoughts: Emerged Stronger

• Management has built a superb Group over the years and, over the current pandemic, reacted swiftly in reigning back expenditure. Following from our previous results note, we believe that H1:21 has demonstrated that the Group has emerged stronger with more market share than at the beginning of this period. In the long-term, this can only be a good thing.
• We expect dividends to resume with the full-year results and have maintained our revenue expectations while adjusting our margin assumptions to reflect the fantastic gains made by the Group in H1:21 annualizing even further into H2:21E.

Forecast, Valuation & Implied Return: EV/EBIDTA lining up with DCF

• We see fair value as 631cps (previously: 464cps) on a Price Earnings (PE) of c.9.2x.
• Interestingly, we have built a new EV/EBITDA Model for ARB against a hand-selected peer set and this model arrives at a fair value of 624cps, thus lending weight to our DCF fair value.
• Our implied 12m TP of 737cps (previous 12m TP: 546cps) places the share on an Exit PE of 12.9x & implies a potential return of c.71%, albeit with typical macro-risks remaining present.
• While “cheap” is not a defining characteristic of the current domestic small cap market, the combination of it with the high-quality of ARB’s track record and prospects makes it unique.

Refer to our original Initiation of Coverage for more background.