Reliance Worldwide: Making connections

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Alex Lu
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By Alex Lu
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Date posted:
27 October 2021, 11:30 AM
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  • Reliance Worldwide's (ASX:RWC) 1Q22 trading update overall was slightly weaker than we expected. Underlying demand remained strong in all regions, but supply chain issues constrained sales.
  • RWC also announced the acquisition of EZ-FLO (#1 major appliance connector manufacturer and distributor in the US) for US$325m. The deal represents an FY21 (Jul Y/E) EV/EBITDA multiple of 12x, or 7x post revenue and cost synergies by 2024. We estimate the deal to be 8% EPS accretive in FY22 and 13% accretive in FY23.
  • We increase FY22-24F underlying EBITDA by 5-13% after factoring in the 1Q22 trading update and EZ-FLO acquisition.
  • Our target price rises to (login to view) and we maintain our Add rating.

1Q22 trading update was a bit weaker than expected

1Q22 revenue rose 8% to US$246.0m while underlying EBITDA increased 3% to US$65.5m. This run rate was slightly below our 1H22 forecast for 11% revenue growth and 6% underlying EBITDA growth.

Reliance Worldwide (ASX:RWC) said underlying demand in all markets remained firm with every region recording sales growth despite cycling a strong pcp. Management noted that the significant step up in demand that was seen in FY21 has consolidated at these higher levels.

Supply chain constraints including shipping delays, freight and logistics disruptions, and raw materials shortages, have all been headwinds and suppressed volume growth. This led to underlying EBITDA margin falling 140bp to 26.6% with price rises only offsetting commodity cost inflation and were overall dilutive to margins.

EZ-FLO looks like a good acquisition

RWC also announced the acquisition of EZ-FLO for US$325m.

EZ-FLO is a leading manufacturer and US distributor of plumbing supplies and specialty plumbing products. Like RWC, EZ-FLO has a large exposure to the US R&R segment with its EASTMAN brand being the #1 player in the large appliance connectors market.

In our view, the acquisition multiples look reasonable with an FY21 (Jul Y/E) EV/EBITDA of 12x, or 7x post revenue and cost synergies by 2024.

Management has identified significant revenue growth opportunities (e.g. driving market share gains across different channels, product extensions, leveraging RWC’s Canada footprint) that is expected to deliver EZ-FLO revenue growth of 10% pa. In addition, RWC expects to deliver cost synergies (e.g. procurement, freight, SG&A) of US$10m pa by the end of year 3 (on a run rate basis).

Management expects the deal to be EPS accretive in year 1 and ROI to be in the mid-high teens post synergies. We estimate the acquisition to be 8% EPS accretive in FY22 and 13% accretive in FY23, with an ROI of 15% in FY25.

With the deal debt funded, we estimate RWC’s FY22F ND/EBITDA to rise to 1.8x (FY21: 0.5x). This is still comfortably within management’s 1.5-2.5x target range.

Changes to earnings forecasts

We increase FY22-24F underlying EBITDA by 5-13% after factoring in the 1Q22 trading update and EZ-FLO acquisition. Excluding the EZ-FLO acquisition, our FY22-24F RWC underlying EBITDA decreases by 3%.

Investment view

Following updates to earnings forecasts our PE-based target price (login to view).

While 1Q22 trading was impacted by supply chain issues, the key for us was the strong underlying demand environment, which should support the medium-term growth outlook. We also think the acquisition of EZ-FLO stacks up well from both a strategic and financial perspective.

Trading on 19.6x FY22F PE and 2.5% yield, we continue to see the valuation as attractive and maintain our Add rating on RWC.

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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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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