Reliance Tightens US Grip With Holdrite

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Reliance Worldwide has acquired Holdrite, providing exposure to the North American new construction market. However, is the outlook for the combined businesses already reflected in the valuation?

-Potential to grow sales of Reliance products as complement to Holdrite products
-Holdrite has a market leading position in several of its product categories
-Should Reliance be trading at such a premium to global peers?
 

By Eva Brocklehurst

Reliance Worldwide Corp ((RWC)) has diversified its business with an acquisition that exposes it to the North American new construction market. The company will acquire Securus, trading as Holdrite, for US$92.5m. The deal will be funded by debt and completion is expected by end of June.

The acquisition makes sense to Morgans, and the multiple is considered reasonable, as Holdrite has generated over 20% revenue growth in the past three years and remains a market leader in many of its product categories. The acquisition also offers additional R&D and innovation capability.

The broker believes the transaction provides the existing Reliance business with a strong foundation in the North American new construction market and the means to grow sales of EvoPex and SharkBite 2XL. Conversely, the company's experience in retail distribution should support future growth for Holdrite products through this channel.

Incorporating Holdrite earnings into forecasts, Morgans increases FY18 forecasts for operating earnings (EBITDA) by 11% and FY19 by 12%. The broker estimates the deal generates 7% accretion for earnings per share in FY18.

That said, Morgans considers the RWC valuation full and maintains a Hold rating on the stock. While attracted to the company's clear market dominance in brass PTC plumbing fittings and strong growth opportunities, the broker believes the attributes are largely reflected in the share price.

Macquarie agrees the acquisition will broaden the customer and channel base and assist with the penetration of EvoPex and 2XL PTC products. The broker also likes the purchase price and expects debt funding can be managed. Holdrite is growing fast, Macquarie observes, and the transaction value compares well to recent similar deals in the US building materials segment.

Holdrite

The company provides engineered products and services such as water heater accessories, fittings restraints, fire stop systems, secondary pipe support and acoustic isolation to plumbers and contractors, mainly in the residential and commercial new construction markets.

Over 98% of the product sales are in the US and Canada, largely through wholesale distribution channels. Holdrite has a market leading position in a number of its product categories with a manufacturing facility in Tennessee and distribution centres in Tennessee and Nevada.

Key management personnel will stay with the business and a portion of the purchase consideration remains in escrow as an incentive for management until certain conditions are satisfied.

Ord Minnett considers the transaction is firmly in line with the Reliance acquisition strategy, providing complementary products and offering scope for cross-selling. Holdrite currently generates a small portion of sales through The Home Depot and Lowe's and the broker suggests there is scope for Reliance to expand its presence with both retailers.

Deutsche Bank is not such a fan of the deal. The broker questions a benefit of acquiring a business with minimal synergies, albeit accretive, when the company has significant growth potential in existing business.

The broker notes 80% of the Holdrite products are sold to plumbing and mechanical contractors through wholesale channels and this is double the 40% of products that Reliance sells through its wholesale channels.

In addition, while there might be some scope to cross-sell products through leveraging existing distribution with Home Depot and Lowe's, the broker believes the company would have been better served focusing on the ramp-up of Lowe's sales and the ramping down of Home Depot sales, as well as the launch of EvoPex.

Deutsche Bank also suggests, acknowledging the cynicism in the comment, that the acquisition could have been announced to minimise potential risk to the FY18 earnings gap, which emerges from the ramping down of Home Depot sales.

While the growth profile of the stock is attractive, particularly from FY19, Deutsche Bank does not believe it should trade at such a significant premium as it does to global peers, particularly James Hardie ((JHX)). The stock is calculated to be averaging 26.2x on an estimated FY18 price/earnings ratio versus the global peer average of 16x.

The are two Buy and two Hold ratings on FNArena's database. The consensus target is $3.40, suggesting 1.6% upside to the last share price.
 

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