Reliance Worldwide: Toughing it out
About the author:
- Author name:
- By Alex Lu
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- Date posted:
- 02 May 2022, 9:00 AM
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- Reliance Worldwide's (ASX:RWC) 3Q22 trading update overall was weaker than we expected, with sales growth broadly in line but underlying EBITDA was impacted by higher costs despite the company’s efforts to mitigate through price rises.
- Divisional EBITDA growth (3Q22 YTD): Americas -0.5%; APAC (in AUD) -6.1%; EMEA (in GBP) -5.1%.
- Management said demand remains strong in most markets with ongoing price rises applied to offset cost inflation.
- We decrease FY22-24F underlying EBITDA by 7% and underlying NPAT by 9%.
- Our target price falls to (login to view) and we maintain our Add rating.
Earnings negatively impacted by cost inflation
3Q22 YTD sales rose 14%, which was broadly in line with our 13% forecast for the full year. However, the 4% decline in underlying EBITDA was well short of our 6% growth expectation.
RWC realised weighted average price increases of 8.7% over the period across all regions, which were necessary to cover input cost inflation particularly in copper, resins, and steel.
These price rises were only enough to cover input cost increases and were overall dilutive to margins, with other pressures including shipping, freight and higher energy costs also having a negative impact.
Encouragingly, recent price adjustments and further increases planned for 4Q22 is expected to deliver a near 10% rise for the full year, which will positively impact 4Q22 margins. RWC expects 4Q22 EBITDA margin to be in the mid-20% (ex-EZ-FLO) (vs 23.9% YTD) but will fall a little short of the previous target of 26.0% achieved in FY21.
Divisional summary (3Q22 YTD)
Americas EBITDA fell 1% (or -7% ex-EZ-FLO) despite sales rising 20% (or +5% ex-EZ-FLO). Underlying sales growth reflected price rises and the cycling of a winter freeze event in the US in the pcp, however earnings were negatively impacted by cost pressures and a two-week shutdown in Ningbo (China) in January due to an outbreak of COVID.
Positively, RWC said margins are expected to improve in 4Q22 with stronger margins seen in March and into April.
APAC EBITDA fell 6% despite sales growing 9%. Sales were driven by continued strong growth in residential construction and remodeling activity in Australia while margins reflected the cycling of strong US freeze related intercompany volumes in the pcp and a negative profit in stock movement.
EMEA EBITDA fell 5% on the back of a 1% decline in sales. While Continental Europe sales were higher driven by higher demand for water filtration and drinks dispense products, UK plumbing and heating volumes were lower as demand returned to more normal levels following elevated COVID-related growth in the pcp.
Management said demand remains positive underpinned by solid repair, maintenance and remodeling activity, and elevated levels of new home construction.
The company will continue to pursue cost out initiatives, but current supply chain constraints have slowed progress in this area.
Rising interest rates, higher input costs and other inflationary pressures, together with supply chain constraints, remain potential headwinds for the medium term.
Changes to earnings forecasts and investment view
We decrease FY22-24F underlying EBITDA by 7% and underlying NPAT by 9%.
Our PE-based target price decreases to (login to view) and with a 12-month forecast TSR of 26%, we maintain our Add rating.
In our view, risks remain around further input cost inflation and ongoing supply chain disruptions. However, the key for us was that underlying demand remains strong in most markets and RWC’s ongoing ability to deliver price rises.
While the current operating environment remains volatile and uncertain, we believe the underlying fundamentals of RWC’s business remains sound with a healthy balance sheet, experienced management team, and solid long-term growth opportunities.
Trading on 13.9x FY23F PE and 3.6% yield, we continue to see the stock as offering good value for long-term investors, notwithstanding near-term headwinds.
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