ARB share price rallied to a two-year high on profit results and outlook

The ARB Corporation Limited (ASX: ARB) share price surged to a two-year high this morning on the back of its profit results.

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The ARB Corporation Limited (ASX: ARB) share price surged to a two-year high this morning on the back of its profit results.

The ARP share price surged 4.5% in early trade to $22.88 when the S&P/ASX 200 Index (Index:^AXJO) was trading only a little above breakeven.

The four-wheel drive accessories group not only managed to lift FY20 sales and profit during a challenging period, but it will maintain its full year dividend payment.

Flat is the new up for dividends

This is likely to be warmly welcomed by shareholders as ASX stocks have been cutting dividends during this reporting season. Westpac Banking Corp (ASX: WBC) is the latest to disappoint on this front.

But investors can expect a double dose of dividends from ARB. It declared a final dividend of 21 cents a share to be paid in October and said it will also pay its deferred February interim dividend of 18.5 cents at the same time.

ARB profit results beat the downtrend

This isn't the only pleasing piece of news. The group reported a 4.6% increase in FY20 total revenue to $467 million and a 0.3% improvement in net profit to $57.3 million.

Not a bad result given that sales came to a crashing halt in April and May due to COVID-19 before rebounding sharply in June.

What's driving sales

The growth in the top-line was largely driven by recent acquisitions, including Beaut Utes and PRO-FORM Plastics.

The Australian Aftermarket division also increased modestly despite new vehicle sales falling for 28 months straight with the pandemic exacerbating the most recent periods.

It's Original Equipment Manufacturer (OEM) division was the main drag as sales in that part of the group tumbled 12.9% in the last financial year.

Promising signs for FY21

But investors may be willing to overlook this as management painted a more bullish outlook than I was expecting.

While ARB refused to provide any specifics about the next 12 months as COVID-19 turned forecasting into a tarot card reading, it did point out a few promising signs.

Firstly, the new financial year kicked off on a strong footing with July sales hitting a record. The group also plans to add three new ARB stores to its current network of 67. These stores are an important growth driver for ARB.

Further, its struggling OEM business may see an improvement in FY21 as management signed several new contracts with customers that will commence in the next six months.

ARB also holds a strong balance sheet with $41.6 million in cash (an increase of $33.1 million) and can access another $55.6 million in debt.

Some small negatives in ARB's results

But it's not all good news. The coronavirus disruption to its manufacturing operations means it's now struggling to fulfil orders and the group needs more time to get its global plants and supply chains back to pre-COVID-19 conditions.

Inventory management is an emerging theme during this reporting season, but only for ASX stocks that are performing well during the crisis. JB Hi-Fi Limited (ASX: JBH) is another example as it runs low on stock due to high demand for IT equipment and whitegoods during the lockdown.

Another possible negative from ARB's results is how government wage subsidies have kept its profits in the black.

The group received $9.5 million from the Australian and New Zealand governments during the pandemic, which helped pad its bottom line.

Motley Fool contributor Brendon Lau owns shares of Westpac Banking. Connect with me on Twitter @brenlau.

The Motley Fool Australia has recommended ARB Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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