Reece: US going strong

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Alex Lu
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By Alex Lu
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Date posted:
28 February 2022, 11:00 AM
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  • Reece's (ASX:REH) 1H22 result overall was above expectations and guidance provided at the AGM in October.
  • Key positives: US EBITDA margin rose 30bp despite supply chain constraints and ongoing investments in the branch network and digital.
  • Key negatives: ANZ EBITDA margin fell 60bp; Operating cash flow was -$83.7m vs $89.5m in the pcp due to higher working capital (predominantly from the strategic decision to hold higher inventory levels in the current environment).
  • The outlook remains positive with REH noting customers are busier than ever and construction activity remains solid despite a number of risks.
  • FY22/FY23F/FY24F underlying EBITDA changes by +6%/+7%/+6%.
  • Our target price increases to (login to view) and we maintain our Hold rating. We view REH as a high-quality business with a long-term track record of growth but trading on 35.2x FY22F PE and 1.3% yield we see the valuation as full.

1H22 result was above expectations

Underlying EBITDA grew 14% to $397m (+4% vs MorgansF and +9% vs Visible Alpha consensus) versus management’s guidance for growth of between 8-11%.

Sales increased 17% reflecting strong demand conditions with volumes remaining elevated as customers worked through a backlog of demand. High price inflation was evident across both regions with REH estimating inflation in ANZ grew at 8-9%, while the US experienced 12-13% growth.

ANZ was disrupted by COVID

ANZ EBITDA increased 6% to $249m, which was 3% below our forecast. Sales rose 11% reflecting product inflation but also solid demand despite a COVID disrupted period that included extended lockdowns in NSW, VIC and NZ. EBITDA margin fell 60bp to 14.4% due mainly to higher staff numbers and wage inflation.

US performance was robust

US performance was a key highlight with EBITDA jumping 30% to $148m. This was 17% above our forecast and reflected solid demand and price inflation. On a constant FX basis, EBITDA also increased 30% with FX having a negligible impact on earnings translation.

REH continued to develop its branch network in the US with investment in new store formats and service concepts to get a better understanding of the market and its customers. The company introduced the Reece brand at the corporate level with a network rollout to start later in the calendar year that will increase its exposure to the R&R market.

REH also launched its online platform (max) during 1H22 that is tailored specifically to the US market and will be a key differentiator against competitors.

US EBITDA margin rose 30bp to 7.9%, which was a strong outcome in our view given the ongoing investments in the business and management’s commentary at the FY21 for a step change in opex. The margin increase reflected scale benefits from 24% sales growth which more than offset cost growth.

Outlook remains positive

REH said it was optimistic about the demand drivers in 2H22 despite several risks (supply chain, inflation, labour) which will require careful management. It said customers are still busier than ever and construction activity remains solid.

For FY22, we forecast underlying EBITDA to be up 13% to $815m with ANZ EBITDA rising 8% to $534m and US EBITDA (in USD) increasing 24% to US$208m.

Changes to earnings forecasts and investment view

With the near-term outlook remaining positive, we increase FY22-24F underlying EBITDA by between 6-7% while underlying NPAT rises by between 10-15%.

Our equally-blended (PE, EV/EBITDA, DCF) target price increases to (login to view) and we maintain our Hold rating.

We view REH as a high-quality business with an experienced management team and a long-term track record of growth. However, trading on 35.2x FY22F PE and 1.3% yield we see the valuation as full.

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Disclaimer: Analyst may own shares. 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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