GWA Group: Housing leverage
About the author:
- Author name:
- By Alex Lu
- Job title:
- Date posted:
- 17 August 2021, 7:00 AM
- Sectors Covered:
- GWA’s FY21 result was ahead of Morgans and Bloomberg consensus estimates.
- Key positives: Improved detached housing construction in Australia in 2H21; Strong growth in NZ and the UK with both markets recovering from COVID-related impacts in the prior year; DPS was higher than expected; Cash flow was strong.
- Key negatives: Commercial construction in Australia remains subdued; Management expects multi-res to decline further due to lower net migration.
- FY22F/FY23F/FY24F underlying EBIT changes by +0%/+0%/+1%.
- Our target price remains broadly unchanged at (login to view) and with a 12-month forecast TSR of 19%, we upgrade our rating to Add (from Hold).
FY21 result was better than expected
FY21 underlying EBIT decreased by 5% to A$68.5m (+5% vs Morgans and +2% vs Bloomberg consensus) while underlying NPAT fell 6% to A$42.3m (+6% vs Morgans and +1% vs Bloomberg consensus).
The year was a tale of two halves with lower earnings in 1H21 (EBIT -16%) primarily due to weaker construction activity in Australia followed by an improvement in 2H21 (EBIT +5%) as detached housing conditions strengthened. Commercial and multi-res activity however remains soft with conditions unlikely to improve significantly until vaccination rates in Australia increase, international borders reopen and net migration rebounds.
FY21 EBIT margin fell 110bp to 16.9% (-220bp in 1H21; 0bps in 2H21). The decline would have been greater if not for a ~5% price rise in August 2020, supply chain savings (A$4m) and Methven synergy benefits (A$3m). Freight remains elevated with GWA expecting freight costs to rise by ~A$6m in FY22, although this should be largely offset by a ~3% price increase (from 1 July 2021) and FX benefits.
The improvement in the balance sheet and strong operating cash flow were key highlights in the result, with FY21 ND/EBITDA falling to 1.4x (vs 1.9x in FY20) and operating cash flow rising 16% to A$103.1m on the back of good working capital management. FY21 DPS of A12.5cps was above ours (A12.0cps) and Bloomberg consensus (A11.5cps) forecasts.
Outlook remains mixed but general conditions should improve
Management expects continued momentum in detached housing on the back of HomeBuilder and healthy consumer sentiment, while residential/commercial R&R (GWA’s key market, representing ~61% of revenue) is expected to be stable to slightly positive.
Commercial new build is likely to remain subdued (growth in education and health offset by declines in office and retail) while multi-res is expected to decline further due to lower net migration.
Ongoing lockdowns (particularly in NSW/VIC) create uncertainty regarding potential impacts on construction markets.
Changes to earnings forecasts
Despite the FY21 result being above our expectations, we are more conservative on growth in FY22 due to the uncertainty around lockdowns (NSW/VIC) and timing of a recovery in the higher margin commercial segment.
We hence make only minor adjustments to earnings forecasts with FY22F underlying EBIT remaining broadly unchanged at A$74.2m while underlying NPAT rises by 1% to A$47.0m.
GWA has good leverage to an improving housing market, which should generally improve in FY22 notwithstanding near-term uncertainty around lockdowns.
Trading on 16.3x FY22F PE and 4.7% dividend yield with a strong balance sheet, we see the balance of risks being to the upside and hence upgrade our rating to Add (from Hold). Our equally-blended (PE, EV/EBITDA, DCF) target price stays broadly unchanged at (login to view).
Key downside risks include a slower-than-expected recovery in the housing market, COVID-related disruption, higher costs, a lower AUD/USD and weaker consumer confidence.
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