Reliance Worldwide: Demand remains positive

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Alex Lu
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By Alex Lu
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Date posted:
22 February 2022, 11:00 AM
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  • Reliance Worldwide's (ASX:RWC) 1H22 result was slightly below expectations.
  • Key positives: Balance sheet remains healthy despite the recent acquisitions of LCL and EZ-FLO with ND/EBITDA at 2.0x vs management’s 1.5-2.5x target; R&R demand in the US remains robust.
  • Key negatives: Group EBITDA margin fell 180bp to 24.1%; APAC and EMEA performance was lower than expected; Operating cash flow fell 47% due to higher inventory levels to mitigate shipping and other logistical delays.
  • No earnings guidance was provided due to the ongoing uncertain operating environment. RWC said trading in January was broadly consistent with trends in 1H22 with Americas sales reflecting ongoing strong demand, APAC benefiting from strength in residential construction and remodeling, and EMEA sales flat.
  • FY22F/FY23F/FY24F underlying EBITDA changes by -1%/0%/0%.
  • Our target price decreases to (login to view) and we maintain our Add rating. Trading on 18.6x FY22F PE and 2.6% yield we continue to see the valuation as attractive for a high-quality company with solid long term growth opportunities.

1H22 result was slightly below expectations

1H22 underlying EBITDA increased 5% to $126m (-3% vs MorgansF and -2% vs Visible Alpha consensus) and underlying NPAT rose 5% to $75m (-3% vs MorgansF and -1% vs Visible Alpha consensus).

Sales growth of 12% (or +7% ex-EZ-FLO) was driven mainly by price increases to offset rising input costs and other cost increases. While RWC said underlying demand remains strong in most markets, direct and indirect supply chain constraints restricted volume growth during the period.

This is consistent with commentary given at the 1Q22 result in October.

Americas in line, APAC and EMEA weaker than expected

Americas EBITDA +4% (in line with MorgansF), EMEA EBITDA +6% (-4% vs MorgansF) and Asia-Pacific EBITDA +10% (-8% vs MorgansF).

Americas sales increased 15% (or +7% ex-EZ-FLO) on the back of price rises to offset cost inflation and the introduction of new products. While underlying volumes were stable due to ongoing strong R&R activity, headline volumes were adversely impacted (one-off) by key customer Lowe’s changing their distribution processes resulting in a reduction in inventory held.

Looking forward, management expects strong R&R conditions to persist in 2H22 with the integration of EZ-FLO so far going to plan. For FY22, we forecast Americas EBITDA to be up 9% to US$132m. 

APAC sales grew 11% (or +10% constant FX) reflecting strength in Australian new housing construction and remodel activity. While EBITDA was 8% below our forecast, the miss was largely due to no cost savings being realised from the LCL acquisition (Jul-21).

We had assumed savings of $2m but with RWC having a lead time for brass purchases of 4-6 months, no inventory from LCL was consumed during the half. RWC expects these savings to flow through from 2H22 (~$7m pa) and we have hence pushed back our estimates accordingly. 

EMEA sales rose 6% (or +1% constant FX) with price rises and strong sales in Continental Europe (+23%) offset by lower volumes in the UK following a return to typical vacation patterns in July and August and the cycling of very strong growth in the pcp (rebound post lockdowns).

Supply chain constraints were also a factor. Looking ahead, management expects demand in the UK to be impacted by higher inflation, labour shortages and ongoing supply chain constraints, while Continental Europe remains positive. For FY22, we forecast EMEA EBITDA to be flat at £71m.

Changes to earnings forecasts and investment view

We make only minor changes to earnings forecasts with FY22-24F underlying EBITDA decreasing by between 0-1%.

Our PE-based target price declines 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, healthy balance sheet and solid long-term growth opportunities with upside from value-accretive acquisitions. Trading on 18.6x FY22F PE and 2.6% yield, we continue to see the stock as offering good value.

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