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ARB Holdings – FY 20 – Battening Down the Hatches

Share Code: ARH – Market Cap: R0.8bn – PE: 10.7x – DY: 0.0%

FY 20 – Winning Amidst A Pandemic

  • During a period deeply marked by the COVID-19-induced lockdown and a global recession, ARB’s FY 20 numbers are not particularly reflective of much other than its environment.
  • Revenue contracted -13%, margins improved as deep cost-cutting, rationalization of operations, retrenchments and management salary sacrifices all protected the Group, & a range of IFRS entries flowed through results distorting comparisons.
  • The Group ended up seeing HEPS rise +3.0% y/y to 59.96cps (FY 19 – 58.2cps), but, above all else, the Group appears to have protected its balance sheet (cash on hand of R152m), bolstered by operations generating R135m (FY 19 – R226m) cashflow.

Our Thoughts: Emerging Stronger

  • Near-term numbers (both historic & forecast) are somewhat meaningless in an environment of heightened chaos & uncertainty with major global variables playing out.
  • Despite this, ARB management has done all the right things and the Group is likely to emerge from this period stronger, if not absolutely then at least relatively speaking.
  • Key variables remain, though, from the global (pandemic & geopolitics) to domestic (infrastructure spend, public sector finances & Eskom) that imply both up- & downside risks.

Forecast, Valuation & Implied Return: Still Underrated

  • We see fair value as 464cps (previously: 562cps) on a Price Earnings (PE) of c.7.4x. This appears reasonable against the various comparatives in the market (average: 10.3x) despite the reliability of PE as a metric declining due to the abnormality of this period and the raft of IFRS non-operational entries flowing through both ARB’s & the rest of the market’s financial results.
  • Our implied 12m TP of 546cps (previous 12m TP: 659cps) places the share on an Exit PE of 8.8x & implying a return of c.56%.
  • While “cheap” is not a unique domestic small cap characteristic, the profitability, cash generation & robust balance sheet of ARB make it one of the higher-quality stocks in this universe.

Refer to our original Initiation of Coverage for more background.