Key points:

• Melbourne-based manufacturer and distributor of four-wheel drive accessories ARB Holdings is a solid well-managed company.
• Ship builder Austal is not a great dividend payer but on consensus target price grounds, looks to be good value.
• Analysts expect a strong rebound in FY16 for household and commercial premises fittings maker GWA Group, with a fully franked dividend of 13.7 cents considered likely.

Investors hear it all the time – Australia’s higher labour costs relative to the rest of the world, greater access to cheaper imports, thanks to the technological revolution, and a stubbornly high Australian dollar make it difficult to earn a decent margin making things in Australia.

But some companies have been able to build their brand strength such that it still makes sense to paste a “Made in Australia” label on their goods. It is difficult to sustain, but here is a look at three local manufacturing stars – which have made hard decisions on expansion abroad, but still retain the bulk of their manufacturing at home.

ARB Corporation (ARB, Closed 26 June at $13.27)

Market capitalisation: $1.05 billion

One of the poster companies for Australian manufacturing is ARB Holdings (ARB), the Melbourne-based manufacturer and distributor of four-wheel drive accessories. ARB exports its products to more than 100 countries worldwide, although 69% of sales go to the Australian after-market. At its Kilsyth base, ARB makes most of its core 4WD product lines, including bull bars, rear bars, side rails, air lockers, shock absorbers, air compressors and dual battery trays.

ARB also has a factory in Thailand. That’s because a large percentage of the pickup trucks sold around the world are made in Thailand, and there is also a very strong local market in Thailand for these vehicles and their associated accessories.

In 2013 ARB opened another Melbourne-based factory, in Bayswater, to build its range of plastic canopies.

ARB has been a sound stock market performer, delivering investors total return (capital gain plus dividends) of 23% a year over the past five years.

Annual sales revenue has grown at an average annual compound rate of 11.2% over the past ten years, while net profit has grown at an average annual compound rate of 13.0% over the same period.

Longer-term, the share price has risen from the 30-cent levels in 1996 to $13.27. Along the way, ARB has been a favoured stock for many small-cap fund managers, on its way to a $1 billion-plus market valuation. But the consequence of being such a strong performer is that the stock looks fully valued.

Analysts say FY15 is a year of investment in products, distribution and corporate structure, and net profit is expected to dip, before bouncing back strongly in FY16. Unfortunately, it is too late for potential investors to pick up the fully franked special dividend of $1.00 a share that was paid to shareholders in December last year. In FY15 that will take the analysts’ consensus forecast payout to 128.9 cents. Back in a normal dividend year, analysts expect 32.3 cents a share in FY16, which prices ARB on a fully franked yield of 2.4%.

ARB is a very good, well-managed company with a solid medium-term growth outlook, but trading at 21.3 times FY16 expected earnings, that outlook is already priced in. The analysts’ consensus price target sees ARB falling back to $12.42. If it does – or even better, goes lower – ARB becomes a good buying opportunity.

Source: Yahoo!7 Finance, 29 June 2015

Austal (ASB, closed 26 June at $1.82)

Market capitalisation: $631 million

The Austal story is another that is often cited as a major success story of Australian manufacturing – with good reason. The company started out in the 1970s in Henderson, south of Perth, building aluminium fishing “tinnies,” before building a global reputation in the high-speed aluminium ferry market, and progressing all the way to where it now holds more than $US5 billion worth of contracts to build advanced aluminium warships for the US Navy.

But along the way, Austal outgrew its home market, establishing shipyards in the US (at Mobile, Alabama) in 1999 and in the Philippines (Cebu) in 2013. The Cebu shipyard handles most of the commercial ship work, while Mobile works on the US Navy contracts and Henderson hosts the remainder of the company’s defence and para-military (police and customs) work. More than 95% of current work and the order book is military or para-military.

The contracts with the US Navy are a $US3.5 billion contract to build ten littoral combat ships (LCSs), which are lightly-armed vessels designed for missions in waters close to shore; and a US$1.6 billion contract to build ten 103-metre Joint High Speed Vessels (JSHVs) for the US Navy.

Austal has had its difficulties on the stock market: the Pentagon was not happy with some aspects of the early LCS ships, at the same time as the company’s debt blew out as a result of losses incurred in the LCS work.

Austal had to mount an emergency $78 million entitlement capital raising in November 2012, which was priced at half the prevailing share price. The share price slid from $3.70 in 2007 to 54 cents in 2012, but ASB has turned the corner quite strongly since then, rising to $1.82.

Austal is not a great dividend payer – the analysts’ dividend consensus forecast puts it on a fully franked yield of 2.5% for FY15 and 2.7% for FY16 – but on consensus target price grounds, the stock looks to be good value, trading with more than 10% upside from present levels.

Source: Yahoo!7 Finance, 29 June 2015

GWA Group Limited (GWA, closed 26 June at $2.35)

Market capitalisation: $720 million

Another small-cap fund manager manufacturing favourite through the 1990s and 2000s, household and commercial premises fittings maker GWA Group has held the line on Australian manufacturing for a long time, but has closed a couple of factories in recent years and started to bring in plastics and vitreous china products from overseas. But it still makes household names such as Dorf tapwear, Caroma baths and showers, Clark kitchen sinks and laundry tubs, and Gainsborough doors and handles.

GWA has struggled since 2007, when it peaked at $4.83, as the construction industry has been hit. The company has sold several business units and in October last year, shed 10% of its workforce and restructured its manufacturing operations. Because of the write-downs stemming from the restructure, analysts do not expect GWA to pay an ordinary dividend in FY15 (although it announced in April a capital return of 22.8 cents a share to investors, and a partly franked special dividend of 6 cents a share.) The dividend had slipped from 12 cents in FY13 to 5 cents in FY14, but analysts expect a strong rebound in FY16, with a fully franked dividend of 13.7 cents considered likely.

In FY14, revenue was up 2% to $578 million, and the net profit – loaded down by one-off significant items – came in at $18.6 million, down from $32.3 million in FY13. But analysts expect a 100% earnings rebound in FY15 and 20% growth in FY16. The dividend expectation would constitute a fully franked dividend yield of 5.8%, and with the shares trading at a 9.7 discount to analysts’ consensus target price ($2.58), GWA looks like a pretty good buy at these levels.

Source: Yahoo!7 Finance, 29 June 2015

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.