GWA Group: Stronger for how much longer?

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Author name:

By Alex Lu

Job title:

Analyst

Date posted:

16 August 2022, 7:30 AM

Sectors Covered:

Industrials

• GWA Group’s (ASX:GWA) FY22 result was largely in line with expectations.
• Key positives: Australia sales +7% due to strong performance in R&R (both residential and commercial); NSW (sales +12%) and SA (+11%) were the key performing states; DPS of 15cps was stronger than our 14cps forecast (Bloomberg consensus 13.9cps); EBIT margin rose 100bp to 17.9% despite cost pressures.
• Key negatives: NZ sales fell 17% reflecting lockdowns and ongoing COVID-related issues (labour shortages); Operating cash flow fell 82% due mainly to higher inventory in response to supply chain challenges (expected to normalise in FY23).
• FY23F/FY24F/FY25F underlying EBIT changes by +0%/-1%/-2%.
• Our target price falls to (login to view) and we maintain our Hold rating. Despite a solid backlog of work that should support further earnings growth in FY23, operating conditions are likely to get tougher in FY24 as higher interest rates, falling house prices and declining building approvals take effect.

FY22 result was largely as expected

FY22 underlying EBIT increased 9% to $74.8m (+1% vs MorgansF and in line with Bloomberg consensus) and underlying NPAT jumped 12% to $47.3m (in line with MorgansF and Bloomberg consensus).

Group revenue increased 3% reflecting higher sales in Australia (+7%) and International (+4%), partly offset by weaker sales in NZ (-17%) due to the five-week shutdown and ongoing COVID-related issues (staff shortages).

One of the key highlights of the result was the 100bp improvement in EBIT margin to 17.9%. Average price rises of ~5% in FY22 more than offset higher freight costs with additional benefits from disciplined cost control.

Management implemented another round of ~5% price rises in ANZ on 1 July 2022 and, on our calculations, should more than offset further increases in freight costs (incremental ~$6-8m) and additional marketing spend (incremental ~$5-6m) in FY23. Overall, we forecast FY23 EBIT margin to rise by 40bp to 18.3%.

Market conditions and outlook

Management expects the residential and commercial renovations & replacements (R&R) segment to remain solid with continued momentum in residential detached new build.

In commercial, GWA is seeing ongoing demand for Care products and signs of a recovery in the new build category.

In multi-residential, management said there are steady signs of recovery in medium-density construction, while high-density is expected to remain subdued until migration levels improve.

Changes to earnings forecasts

Our underlying EBIT forecast in FY23 remains largely unchanged while FY24 and FY25 decreases by 1-2%. FY23-25F underlying NPAT falls by between 2-6% mainly due to higher net interest expense.

Investment view

Our equally-blended (PE, EV/EBITDA, DCF) target price falls to (login to view) reflecting changes to earnings forecasts and our increased cautiousness on the medium-term growth outlook for the housing market.

While the solid backlog of work should drive further earnings growth in FY23, we expect housing conditions to get tougher from FY24 onwards as the impact of higher interest rates, falling house prices and declining building approvals flows through. Hold rating maintained.

Price catalysts

Investor day to be held in late September/early October (date TBC).

Risks

Key upside risks include better-than-expected housing conditions, AUD/USD appreciation and cost-out outperformance.

Downside risks include lower consumer confidence and ongoing COVID-related disruptions.

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