Reliance Worldwide: Still plenty in the pipeline

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Alex Lu
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By Alex Lu
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Date posted:
28 August 2018, 3:00 PM
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Result was broadly in line with our expectations

FY18 underlying EBITDA (excluding John Guest) rose 25% to A$150.9m (in line with Morgans and +1% vs Bloomberg consensus), while underlying NPAT climbed 20% to A$78.6m (+3% vs Morgans and -2% vs Bloomberg consensus).

Group EBITDA margin grew 20bps to 20.3%. Asia-Pacific delivered EBITDA growth of 10% which was broadly in line with our forecast while EMEA EBITDA (excluding John Guest) grew to A$2.5m (vs A$0.5m in FY17).

The key disappointment however was the Americas division. Despite delivering a 28% increase in EBITDA (including A$6m one-off charge due to US import duties) the result was 7% below our expectations.

The balance sheet remains strong, with ND/EBITDA (including John Guest) falling to 1.6x (FY17: 2.0x) while operating cash flow grew 11% to A$80.1m due to the growth in earnings despite an increase in working capital. Total DPS of 6.5cps was below our forecast (7.0cps) and Bloomberg consensus (7.1cps).

Increased expectations for John Guest synergies

Management advised that synergies to be achieved following the John Guest acquisition are expected to be greater than A$20m by FY19 and A$30m by FY20 (on a run rate basis). This represents a 50% increase on previous guidance of A$20m.

While some of the increase will come from revenue synergies, most will come from extra cost savings (eg. procurement, operating efficiencies, business integration, SG&A etc).

Over time we expect RWC to deliver greater revenue synergies as it introduces new products globally with opportunities to leverage the network to enter new markets and channels.

In our view, while execution risk remains the key to the John Guest acquisition, it was nonetheless good to see the integration process get off to a good start.

Decreases to earnings forecasts

We reduce FY19F EBITDA by 4% to A$287m vs management guidance of A$280- 290m. Our FY20F and FY21F EBITDA forecasts decrease by 5% and 3% respectively.

Maintain Add rating

Post updates to earnings forecasts RWC is trading on 26.7x FY19F PE and 1.9% yield. We continue to view RWC as an attractive investment proposition given its strong market positions, experienced management team and strong earnings growth profile (3-year EPS CAGR 26%).

We hence maintain our Add rating on a lower PE-based target (Morgans client access only).

More information

Morgans clients can login to view our detailed report and updated share price target for Reliance Worldwide. Alternatively, please contact your nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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