- RWC’s FY17 result overall was ahead of our expectations.
- Americas was the key driver of the result with EBITDA up 28% and Asia-Pacific grew 21%. EMEA EBITDA however was down 87%.
We increase FY18F underlying EBITDA by 2% to A$148.0m and underlying NPAT increases slightly (1%) to A$76.2m.
- Maintain Hold rating on an increased target price (access for Morgans clients only)
FY17 result was ahead of our expectations
FY17 underlying EBITDA grew 22% to A$120.7m (+3% vs Morgans and +2% vs
Bloomberg consensus) and underlying NPAT increased 26% to A$65.6m (+3% vs
Morgans and +2% vs Bloomberg consensus).
The result was driven by strong sales
growth of SharkBite in North America as well as initial benefits from the rollout to Lowe’s
1,700+ stores across the US.
This was partially offset by FX headwinds, especially the
higher AUD/GBP. EBITDA margin lifted 160bps to 20.1% on the back of procurement
benefits and improved manufacturing efficiencies.
The balance sheet remains healthy,
with net debt/EBITDA at 1.95x (FY16: 1.29x) and interest cover (EBIT) strong at 20.2x
Operating cash flow was up 19% to A$99.5m while FY17 DPS of 6.0cps
was broadly in line with our forecast (5.7cps) and Bloomberg consensus (6.2cps).
Retail distribution network still undergoing changes
RWC has completed the rollout of its full SharkBite range to around half of Lowe’s
1,700+ home improvement stores in the US. Management noted that the rollout added
to FY17 revenue although the EBITDA contribution reflected the setup and training costs
associated with the rollout.
The final phase of the rollout has commenced and
management expects completion in 1H18.
In addition, The Home Depot (THD) began
the process of destocking RWC’s PEX pipe and crimp fittings in all but a small number
of its stores. With many changes happening in RWC’s retail distribution network,
uncertainty remains as to how this will affect earnings over the longer term.
In our view,
the changes have so far been a net positive.
Increases to earnings forecasts
Updates to earnings forecasts see FY18F underlying EBITDA rise 2% to A$148.0m (vs
management guidance of A$145-150m) while underlying NPAT increases slightly (1%)
to A$76.2m. Our FY19-20 earnings forecasts remain broadly unchanged.
Maintain Hold rating – High quality but fully valued
We maintain our Hold rating.
While we are attracted to RWC’s clear market dominance in the brass PTC plumbing
fittings segment (80% market share), strong growth opportunities, experienced
management team and impressive financial returns (FY17A ROE 35%), trading on 25.4x
FY18F PE and 2.0% yield we see these attributes as largely reflected in the current
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