Reliance Worldwide: Strong across the board

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Alex Lu
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By Alex Lu
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Date posted:
24 August 2021, 10:30 AM
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  • RWC’s FY21 result was comfortably above our expectations.
  • Key positives: Earnings growth for all segments was above our expectations; Group EBITDA margin rose 450bp to 26.1% despite input cost pressures; Balance sheet remains strong.
  • Key negatives: Cash conversion was weaker at 98% (FY20: 128%), although was ahead of management’s 90% target; FX translation impact was negative. No FY22 earnings guidance was provided due to ongoing uncertain market conditions and further potential impacts from COVID.
  • However, July sales growth was positive in all three regions with group sales +9% (or +6% constant FX). FY22F/FY23F/FY24F underlying EBITDA changes by +6%/+6%/+6% on a like-forlike basis after moving our forecasts to USD from AUD (in line with RWC’s new reporting currency from FY22 onwards).
  • Our target price rises to (login to view) and we maintain our Add rating.

FY21 result was above expectations

FY21 underlying EBITDA increased 39% to A$349m (+7% vs MorgansF and Bloomberg consensus) and underlying NPAT jumped 63% to A$212m (+11% vs MorgansF and Bloomberg consensus).

Earnings growth was strong across all regions driven by heightened R&R demand, increased detached residential building activity and benefits from a winter freeze event in the US in 2H21.

The balance sheet remains healthy with ND/EBITDA (reported) falling to 0.5x (FY20: 1.4x), which is well below management’s 1.5-2.5x target range. This leaves capacity for further organic growth investments and/or M&A.

While management is actively looking for M&A opportunities, they noted that valuations remain high and will continue to be patient and disciplined. In the absence of investment opportunities, RWC said it will consider share buybacks, although this is not a priority

Growth was strong in all regions

All three segments delivered earnings growth that was above our expectations with EBITDA (constant FX) +54% in Americas (7% above MorgansF), +50% in APAC (17% above MorgansF) and +47% in EMEA (7% above MorgansF).

Americas sales increased 14% (or +27% constant FX) on the back of strong home improvement activity following the outbreak of COVID in late FY20 with strong growth in all channels (retail, hardware, wholesale). Sales were also boosted (+US$42m, or 8.5% growth) by a winter freeze event in Texas in 2H21.

APAC sales grew 13% (or +18% constant FX) reflecting improved Australian housing construction and remodel markets and strong inter-company sales to the Americas due to elevated demand.

EMEA sales rose 21% (or +25% constant FX) as volumes recovered following lockdowns in the UK and Europe in late FY20. Growth was driven by pent-up demand with the UK experiencing strong R&R activity.

July sales were positive in all regions

While no outlook guidance was provided for FY22, management advised that positive sales growth was experienced in July in all three regions with overall group sales up 9% (or +6% constant FX).

RWC said underlying demand remains strong but sales are being constrained by ongoing supply chain disruption including raw materials availability, shipping delays, and a shortage of labour in plumbing trades. For FY22, we forecast group net sales (in USD) to be up 4%.

Changes to earnings forecasts and investment view

We move our earnings forecasts to USD from AUD, which is in line with RWC’s reporting currency from FY22 onwards. On a LFL basis, FY22-24F underlying EBITDA rises by 6% while underlying NPAT increases by 7-10%.

Our PE-based target price increases to (login to view) and we maintain our Add rating. We continue to see RWC as a high-quality business with a well regarded management team, strong balance sheet and solid long-term growth opportunities with upside from value-accretive acquisitions.

Trading on 22.9x FY22F PE and 2.2% yield, we continue to see the valuation as attractive.

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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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