Reece: Reece's Pieces

About the author:

Taarika Raju
Author name:
By Taarika Raju
Job title:
Associate Analyst
Date posted:
11 July 2019, 11:34 AM
Sectors Covered:
Oil & Gas, Mining, Building Materials

  • We initiate coverage on REH with an ADD rating (Morgans clients can login to view).
  • Australia’s leading wholesaler of plumbing and heating equipment. The acquisition of MORSCO makes REH the 5th largest plumbing supplies business globally. 
  • Extensive growth opportunity in the US via the MORSCO acquisition will help offset falling Australian construction to see REH outperform most local peers.
  • We see attractive value on offer in REH, but also highlight a short-term risk around accumulating REH ahead of its upcoming August result, given a string of recent downgrades in the building materials/products sector.
  • We see REH’s value proposition outweighing near term headwinds

Quality foundation

Reece (ASX: REH) is the leading distributor of plumbing, bathroom and Heating, Ventilation, Air Conditioning and Refrigeration (HVAC-R) products in Australia and New Zealand with over 38% market share. Strategically located distribution centres, offering a wide variety of products from premium brands have enabled them to capture large scale contractors who have comprehensive requirements. REH has a premium quality business with a demonstrated focus on customer satisfaction and innovation, keeping them current with technology and market trends.

What's in the pipeline

REH became the 5th largest wholesaler of plumbing products globally after the 2018 acquisition of MORSCO Incorporated in the US. REH expects to gradually induce a cross pollination of best practices and business strategies, bringing the quality of the US business to the same standards as Australia. REH will start to derive synergies in the short term and grow market share through pragmatic store growth, in greenfield sites as well as acquisitions in the medium term.

Valuation

We initiate coverage on REH with an ADD rating (Morgans clients can login to view) based on DCF valuation. We are drawn to REH’s impressive financial returns (FY18 ROE 14.8%) and earnings potential in the US. REH is trading on a FY20 PE multiple of 20.6x, a 19% premium on the S&P200 All Industrials, which is a relative discount to its five-year average historical premium of 35% on the All Industrials. We believe there is ample upside to the share price in the medium term as the US operations begin to benefit from consolidation.

An opportune annexation

As the construction cycle winds down in Australia, we believe the MORSCO acquisition creates a well-timed opportunity for REH to leverage underlying economic growth in the US in the short term. REH stands to derive economic benefits from consolidation activities in the highly fragmented, wholesale plumbing supplies market in the sunbelt region of the United States. At this juncture, the US market for wholesale plumbing generates US$57bn in revenue, with 5 of the top companies servicing only 31% of the market. We believe REH is in a poised position to evolve in to a premium global business with continued store growth in the US.

More information

Morgans clients can login to view our detailed report and initiated share price target for Reece (REH). Alternatively, please contact your Morgans adviser or 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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