Reece: The US will need some work
About the author:
- Author name:
- By Alex Lu
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- Date posted:
- 26 August 2021, 11:30 AM
- Sectors Covered:
- REH’s FY21 result overall was above our expectations.
- Key positives: ANZ EBITDA was 7% above our forecast with good EBITDA margin expansion (+100bps); Balance sheet leverage (ND/EBITDA) improved to 1.7x (FY20: 2.2x).
- Key negatives: US EBITDA was 6% below our forecast; Group operating cash flow fell 38% due mainly to negative working capital movements and higher cash tax paid.; FX impact was negative.
- No FY22 guidance was provided with management noting the future continues to be unpredictable. However, management indicated that investment will lift in both ANZ and the US with a step change in opex in the US.
- FY22/FY23F/FY24F underlying EBITDA changes by -6%/-1%/0%. Our target price rises to (login to view) as we believe the increased investments will deliver longer term benefits, but with a 12-month forecast TSR of -35% we retain our Reduce rating.
FY21 result overall was above our expectations
FY21 underlying EBITDA increased 11% to A$720m (+3% vs MorgansF and +2% vs Bloomberg consensus) and underlying NPAT rose 22% to A$286m (+13% vs MorgansF and +3% vs Bloomberg consensus).
The result was driven by favourable housing conditions in both ANZ and the US, an incremental 3-month contribution from the Todd Pipe acquisition in October 2019, and price inflation in 2H21.
ANZ was the standout performer
The ANZ performance was the key highlight with EBITDA up 17% to A$496m. Growth reflected solid volume growth (+6%) as housing and renovation activity remained solid during COVID as consumers invested more in their homes, as well as price inflation due to supply chain constraints and cost pressures in 2H21.
Volume growth and operational efficiencies drove ANZ EBITDA margin up 100bp to 15.7%.
US earnings were below our expectations
US EBITDA was down slightly (-1%) to A$224m, which was 6% below our forecast.
On a constant FX basis, EBITDA increased 10% driven by a strong housing construction market in the US, an incremental 3-month contribution from Todd Pipe, as well as price inflation and benefits from a freeze event in Texas in 2H21. We estimate the freeze event added 4% to US sales in FY21.
While FY21 US EBITDA margin was flat at 7.2%, margins were down 60bp in 2H21 on the back of a step up in costs related to labour and technology. Management has indicated a step change in both capex and opex in the US going forward, suggesting to us that margins are likely to come under pressure in the near term.
No outlook guidance was provided
No FY22 guidance was provided with management noting the future continues to be unpredictable.
In relation to the market, REH is seeing challenges related to price inflation, ongoing COVID waves, supply chain constraints, labour shortages and capacity shortages.
Changes to earnings forecasts
Despite the slightly better-than-expected FY21 result, we decrease FY22F underlying EBITDA by 6% to A$673m and underlying NPAT by 9% to A$255m.
The reduction in our forecasts largely reflect lower earnings in the US after backing out the benefit of the Texas freeze in 2H21 and lower margins due to the step up in opex. Our group estimates for FY23 and FY24 remain broadly unchanged, although we note forecasting remains difficult due to the ongoing impact of COVID.
We continue to view REH as a defensive business with an experienced management team and solid long-term growth opportunities. However, trading on 56.5x FY22F PE and 0.8% yield we see the stock as overpriced and see better value elsewhere.
Our equally-blended (PE, EV/EBITDA, DCF) target price increases to (login to view) as we believe the increased investments in ANZ and the US will deliver longer term benefits, but with a 12-month forecast TSR of -35% we retain our Reduce rating.
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