Australia | Dec 18 2018
NZ-based manufacturer Methven is expected to extend GWA Group's range of bathroom & kitchen products and diversify its geographic exposure.
-Accretive deal, expands GWA exposure to renovations in Australia
-Yet caution warranted as housing in core Australian market is subdued
-Execution the main risk in managing a more geographically diverse footprint
By Eva Brocklehurst
GWA Group ((GWA)) will acquire Methven, providing a complementary set of products and greater exposure to the renovations market, as well as potential to leverage Methven's international footprint.
GWA has made in all cash offer for Methven, the Auckland-based designer and manufacturer of showers, taps and valves. The offer is NZ$1.60 a share, which implies an enterprise value of NZ$140m. The deal will be funded by existing debt facilities. The acquisition price of NZ$118m implies a 10x enterprise value/operating earnings (EBITDA) multiple, in Deutsche Bank's calculations.
Brokers expect Methven will support GWA's, now solely bathrooms & kitchens business. Methven owns three of the six patented shower technologies globally and this would increase GWA's exposure to renovations in Australia to 57% from 53%.
Methven would also expand the geographic footprint in the UK, China and Southeast Asia. The Methven business generates comparatively lower earnings (EBIT) margins, at 13% versus 25%. Ultimately Citi expects value will be bedded down in a few years time, once the lower end of the synergy target ($5m) has been achieved, which will be offset in the beginning by $5m in costs.
Morgans estimates the deal will be accretive to earnings per share by 8% in FY20 and 11% in FY21, and suspects management is being conservative with guidance. The broker also estimates the transaction will generate a reasonable 12% return on investment by FY21, with upside if synergy targets are exceeded.
While the acquisition may appear accretive, Deutsche Bank is still concerned about a continued downturn in Australian and, to a lesser extent, NZ residential markets. While the main positive is the enhancement of GWA's presence in the more stable renovations market, Morgans concurs with these concerns and maintains a Hold rating, given housing conditions in the core Australian market are subdued.
Citi upgrades to Buy, excited by the expansion that Methven has mapped out in China. The company has goals of 20% in EBIT margins in year three, 200 stores by 2022/23 and RMB40m in revenue by 2022. Methven has signed up 44 new distributors in China and Southeast Asia in FY18 and GWA is confident it can also leverage the UK sales team to increase UK revenue by up to 30%.
It is not unreasonable, Citi points out, to expect GWA can leverage a superior network to push Methven product, such as expanding Caroma products in the UK and supply whole-of-bathroom solutions in Asia. However, the extent to which pushing Methven product in the UK may cannibalise Dorf sales is an unknown.
All up, Citi believes, not only will GWA have increased scale that can provide manufacturing and distribution cost savings, there will also be better bargaining terms with major buyers.
The deal is subject to a number of approvals and Morgans makes no changes to forecasts at this stage. Overall, the acquisition makes sense to the broker as it opens up a range of opportunities outside of Australia. Execution is the key risk, as management will need to manage a much more geographically diverse business.
Operations in New Zealand contributed 31% of FY18 revenue, Australia 42%, and the UK 25%. Morgans views the company as an innovator, with strong products in development, that will also create cross-selling opportunities.
Methven is positioned as an affordable premium brand and is slated to launch new tap and shower technologies in FY19, which Citi expects may help stem market share losses seen recently in New Zealand. The company has over 80% exposure to renovations and replacements.
FNArena's database shows two Buy and three Hold ratings for GWA. The consensus target is $3.47, suggesting 18.7% upside to the last share price. The dividend yield on FY19 and FY20 forecasts is 5.9% and 6.0% respectively.
See also, GWA Group Emphasising Renovations on Sep 26, 2018.
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