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Reliance Worldwide Flush With Confidence

Australia | Apr 28 2021


Record-breaking cold in the US state of Texas underpinned solid sales growth for Reliance Worldwide in the March quarter and management is confident momentum can be maintained

-Input cost increases being offset by price rises and higher volumes
-Long-term opportunities exist on the back of a healthy balance sheet
-Can strong growth be maintained when current tailwinds ease?


By Eva Brocklehurst

Buoyant housing renovations markets sent sales through the roof for plumbing parts manufacturer Reliance Worldwide ((RWC)), with revenue in the March quarter up 27% in constant currency terms. Revenue in the Americas was up a substantial 39%, at least 50% of this strength attributed to the Texas freeze event.

Such was the impact of the polar vortex in February that ice storms and record-breaking cold ensued in the usually comparatively warmer US state of Texas. As a result thousands faced damage from burst pipes and required emergency plumbing.

Moreover, Credit Suisse points out America was cycling 15% growth from the prior corresponding period. The broker models revenue holding up throughout FY21-22 as increases in Asia-Pacific and Europe and the Middle East (EMEA) offset a decline in the Americas, given the likely non-recurrence of the estimated US$30m boost from the Texas freeze event.

Stripping out the freeze affect, UBS suspects March quarter US sales growth may have been closer to 16%, albeit still sound. Subsequently US sales forecasts are lifted by 20% to US$309m for the second half. Europe and the Middle East produced sales growth of 13% which impressed the broker as well, with support from solid renovations activity across the UK plumbing market.

April sales to date are still substantially ahead and management claims it is yet to witness signs of a slowdown and is increasingly confident that increases in raw material costs can be offset through higher prices, while higher volumes will also help margins.

Copper/zinc/resin costs have been on the rise but contract negotiations completed and in train signal this can be offset. Morgans, while welcoming management's confidence, highlights its previous concerns regarding the impact of higher input costs and believes the true extent will not be known until the FY21 result in August.

While increasing earnings forecasts, the broker reduces underlying operating earnings estimates by -4% for FY22, to reflect the unprecedented demand environment in FY21 and cycling of the freeze event.

Moreover, Morgans asserts a lot will depend on the rolling out of vaccines globally and consumer attitudes towards further renovations activity. The broker upgrades to Add from Hold, concluding this is a well-managed business with long-term opportunities and a healthy balance sheet.

Re-Rating Potential?

UBS believes the muted reaction in the share price reflects a cautious outlook and the market is pricing in around 5% long-term US sales growth that assumes no long-lasting impact from the pandemic. That said, market share gains for the company and its retail partners are likely to endure, in the broker's view, offsetting any modest volume contraction.

Credit Suisse is more positive and considers the stock has re-rating potential if it can extend its 12-month record of beating expectations. For Morgans, potential catalysts include both value-accretive acquisitions and/or capital management initiatives such as a buyback.

With a conservatively geared balance sheet the company is able to add to its growth profile through selective acquisitions or capital management, Ord Minnett agrees. There may be few signs the market is slowing yet the broker forecasts a moderation in sales growth in the fourth quarter as strong prior periods are cycled. No specific earnings guidance was provided for FY21.

Acquisitions are moving into Macquarie's line of sight, too, given the balance sheet has the capacity. This is an option the broker does not believe is recognised in the current multiples. Demand remains strong, underpinned by renovations activity, and Macquarie lauds the company's ability to pass on costs.

Morgan Stanley accepts management's confidence regarding cost mitigation is a positive but observes it may not have been as definitive as the market had hoped. The broker's main issue is about the shape of the growth trajectory when current tailwinds ease.

FNArena's database has four Buy ratings and two Hold. The consensus target is $5.21, suggesting 4.1% upside to the last share price. This compares with $4.86 ahead of the update.

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