Why Citi has downgraded ARB’s price target by $8

Citigroup downgraded its outlook for four wheel drive (4WD) accessories and aftermarket parts player ARB Corp (ASX:ARB) to “Neutral” on Thursday, also downgrading the stock’s price target. 

Citi now gives ARB a price target of $31.79, downgraded from $39.25. 

As at 1320 AEST Thursday 9 February 2023, the stock is priced at $30.18. 

This reflects a Total Shareholder Return (TSR) of just over 5%. 

What’s going on?

The bank’s analysts are cautious on the stock after ARB’s February trading update this week.

In short: momentum for aftermarket 4WD accessories in Australia is slowing down. This comes as something of a surprise for Citi’s analysts.

ARB specialises in accessories for 4WDs and SUVs. The bank highlighted in its Thursday note that Australian SUV sales were up 18% year-on-year in the month of January.

The rate has slowed somewhat since December, where SUV sales were 22% higher pcp. 

Fun fact: Tesla Model 3 sales alone pushed up passenger car sales 2% higher in January as the manufacturer drops its prices in Australia. 

Okay - so where are customers for ARB’s products? 

The team had a few theories for what’s going on, but perhaps the most interesting thing about Citi’s Thursday note is that the analysts appear stumped. 

“The early February 2023 update implied slowing momentum on the core Australian aftermarket division, which in our view was surprising given improving Australian new car sales trends,” Citi analysts wrote.

Perhaps because COVID lockdowns were such a boon for the company as Australian families turned to our own backyard to scratch the travel itch, there just aren’t that many people right now without accessory-laden vehicles.

Or perhaps the people who bought SUVs and 4WDs in December and January are yet to get tired of the showroom floor look, but the urge to customise will come. 

You wouldn’t put new shoelaces on new sneakers the moment you got them, after all. 

To quote Citi’s analyst team: “it remains to be seen.”  

They give three possibilities behind the slowdown: 

• “Softening of end user demand” 

• Loss of market share due to “suboptimal fitting,” implying competitors may be better at installing aftermarket accessories 

• Price rises due to cost inflation shifted to customer 

What, exactly, left the Citi analysts to cite possible concerns around the quality of parts fitting is unclear. 

Who remembers the chip shortage?

The bank expects the auto sector through CY23 to be marked by the ongoing microchip shortage headwind, but ARB, being a car parts company, is largely exempt from this headwind.

Its core products are more like headlights, bumper bars, 4WD snorkel exhausts, and things of that ilk which do not necessarily require semiconductors. 

Ford motor production in Q4 of last year fell short by 100,000 vehicles due to semiconductor supply issues. 

But that still doesn’t explain softening demand for ARB's aftermarket 4WD/SUV parts in Australia.

ARB's one year charts