Reliance Exudes Confidence

This story features RELIANCE WORLDWIDE CORP. LIMITED. For more info SHARE ANALYSIS: RWC

Plumbing fittings specialist Reliance Worldwide beat prospectus with its maiden FY17 result and has exhibited a high level of confidence in its FY18 guidance.

-Americas shine as SharkBite continues to penetrate and retail channels expand
-Strong growth opportunities amidst dominant position in brass PTC fittings
-Low likelihood that Home Depot will completely de-stock SharkBite
 

By Eva Brocklehurst

Plumbing fittings specialist Reliance Worldwide ((RWC)) beat its prospectus with the company's maiden FY17 result and has exhibited a high level of confidence in its FY18 guidance. The FY18 guidance range for operating earnings (EBITDA) is $145-150m.

To stake out a narrow range so early in the year signals to Macquarie that confidence is high and the business is extending its growth opportunities, indicated by the strong exposure to the wholesale channel with its recent acquisition of Holdrite.

The main disappointment for Macquarie was that the Europe, Middle East & Asia segment earnings missed estimates, notwithstanding a 19% constant currency improvement. Uncertainty following the UK Brexit decision affected the EMEA result as well as higher costs from a weaker GBP. The Americas were the shining light, with continued penetration of SharkBite PTC (push to connect) and a new expanded retail channel strategy.

The tight FY18 guidance surprised Deutsche Bank, particularly given there is more than 10 months until the end of the fiscal year. Excluding earnings contributions from Holdrite in FY18, and one-of costs taken above the line in FY17, Deutsche Bank factors in FY18 growth in operating earnings of 2% and highlights, while FY18 guidance incorporates underlying growth of 9%, this still does not justify the implied price/earnings ratio of 26.6.

The result may have been solid but the broker retains a Sell rating because of the risks around further contract losses from Home Depot and execution risk as the Lowe's business ramps up. Moreover, there is additional risk from the copper price.

US Retail Exposure

The second half included sales from Lowe's and a full year of Home Depot sales, prior to the Crimp and Pex pipe no longer being supplied from the first half of FY18. In addition, an alternative PTC pipe fitting supplier, Tectite, is now exclusively supplying Home Depot in the Pacific Northwest. There is a risk, therefore, that further losses of Home Depot contracts can occur.

Ord Minnett agrees that the main risk lies with the Home Depot business, as it could choose to further de-stock the company's PTC range beyond the Pacific Northwest. Despite this uncertainty, the broker is comforted by the Home Depot management comments that it is planning to increase shelf space for PTC products through its store network in some regions, rather than de-stock.

Ord Minnett believes Reliance offers an attractive investment proposition, with high-quality earnings growth that is underpinned by continued penetration of its PTC fittings as well as expansion of other products into new markets.

Bell Potter considers the distribution changes to Home Depot combined with the Lowe's business entry is a positive development and the likelihood that Home Depot will completely de-stock SharkBite products is low.

The company has rolled out the SharkBite range to around half of Lowe's 1,700 or more home improvement stores in the US. While rolling out to stores added to FY17 revenue, the contribution to earnings reflected the costs associated with set up and training.

Market-leading Position

There are many changes happening in the company's retail distribution network, and there is uncertainty as to how this will affect earnings over the longer term, yet Morgans believe,s so far, this has been a net positive for Reliance.

While attracted to the company's clear dominance of the market in brass PTC plumbing fittings and the strong growth opportunities, the broker believes the financial returns and growth opportunities are largely reflected in the current share price.

Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $4.15 target. The broker upgrades forecasts for earnings per share by 9.0% and 8.8% for FY18 and FY19 respectively.

Bell Potter is also attracted to the company's market-leading position in PTC fittings in North America. Moreover, SharkBite fittings continue to win market share in North America and the rolling up to Lowe's is expected to result in further uptake of the products.

FY18 will also mean a full year's contribution from Holdrite, which generates an earnings margin roughly comparable to the company's existing business. This brings further scale to the wholesale channel and provides an entry point for new residential construction in North America. Bell Potter also believes these channels will provide a suitable cross-selling opportunity for the company's EvoPEX product.

FNArena's database shows two Buy ratings, one Hold (Morgans) and one Sell (Deutsche Bank). The consensus target is $3.75, suggesting 0.1% upside to the last share price.
 

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