Has Reliance Worldwide’s Upswing Peaked?

Australia | Aug 27 2021

While the pandemic has been a net positive for Reliance Worldwide, brokers now see the longevity of the covid-related spending boost as the biggest uncertainty

-Synchronised uptrend across all 3 geographiess continues into early-August
-Macquarie revisions underpinned by forex changes
-Global plumber shortage blurred by supply chain disruptions
-Uncertainty over future growth rates

By Mark Story

While covid has added to staffing and supply chain challenges for Reliance Worldwide Corporation’s ((RWC)) 15 manufacturing plants, 24 distribution hubs, and five R&D centres around the world, the delta wave has perpetuated unprecedented demand for the plumbing supplies manufacturer’s products which emerged early in 2020.

A global uptick in repair and remodel (R&R) – due to more people working, resting, and playing at home -- plus new housing construction markets have arguably helped Reliance deliver a 63% increase in underlying profit to $211.9 million for the 12 months ended June 30, with sales up 15% to $1.3bn.

By segment, earnings increased 52% in the Americas – due in part to a ‘winter freeze’ event in Texas -- 50% in Asia Pacific, and 45% in Europe, Middle East, and Africa (EMEA), and the uptrend has continued into early-August.

Slight detractors from an otherwise quality result were the accounting for a $10.9m profit on stock and the exclusion of a $8.5m restructuring cost associated with reconfiguration of warehousing capacity in the US ($6.3m) and UK ($2.2m) from underlying results.

While the rate of growth has slowed, underlying demand remains robust, with the company achieving positive sales growth in July in all three geographies, with net sales up 9%, and up 6% on a constant currency basis.

Following a stronger than expected result in FY21 and strong underlying conditions in the company’s key markets, Ord Minnett, which has a Buy on the stock (target price $7.00) has increased FY22/23 earnings forecasts by 11.7% and 12.3% respectively. With the company’s three key geographies in synchronised upswing, the broker is forecasting further earnings improvements in the period.

However, while Macquarie admits the underpinnings of the market context remain solid, the broker believes growth has now peaked. While Macquarie believes the company is executing well in this context, the broker concludes that the stock is fairly valued and reiterates a Neutral rating (target $5.70).

Macquarie notes while FY22, FY23, and FY24 earnings per share (EPS) forecasts are up 5.9%, 3.6%, and 1.1% respectively, revisions are largely driven by the broker’s forex changes. While Macquarie admits in the current time-pressured supply chain, Reliance could well drive conversion faster than normal, the broker still regards the broader growth headwind as hard to overcome.

The broker reminds investors that while Reliance did not provide specific FY22 guidance, the group expects growth rates to slow significantly.

Despite the strong FY21 result, Morgan Stanley, which has a Hold rating on the stock, (target $6.00) also expects modest growth over the next two years.

Growth outlook

While underlying indicators remain positive, UBS believes that slowing DIY, supply chain pressures, and a non-recurring FY21 one-off US$42m in freeze event benefit, means  Reliance unlikely to see above-normal volume growth going forward.

Following a period of strong share performance, and a softer outlook, UBS downgrades the company to Neutral from Buy and has lowered its target price to $5.80 from $6.16.

While management expects price increases (6%) to limit margin dilution to less than 100bps despite significant cost pressure, UBS is factoring in a -150bps decline in earnings margins year-on-year.

The discrepancy, explains UBS, is based on the broker’s expectation that Reliance is likely to see an uptick in selling, general and administrative expense (SG&A) in the Americas, as discretionary costs return and non-recurrence of the freeze benefit to margins in second half FY21. While UBS’s long-run Americas earnings margin of 17.5% remains unchanged, the broker notes some upside risk with the spot copper price declining to US8,900/t.

Overall, UBS’s FY22 net profit forecast declines -4% on lower top-line growth given non-recurrence of the freeze benefit and moderating R&R growth rates, with margins broadly unchanged at a group level.

Based on strong underlying demand, Morgans which has an Add rating on the company (target price $6.50), forecasts FY22 group net sales (in USD) to be up 4%. Morgans move earnings forecasts to USD from AUD, in line with Reliance’s reporting currency from FY22 onwards, and on a like-for-like basis, the broker’s FY22-24 underlying earnings estimates rise by 6%, while underlying net profit increases by 7-10%.

While not strictly visible in consensus forecasts for FY22 revenue growth, Credit Suisse observes the potential for a large FY22 reversion to have been a key investor concern.

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