Treasure Chest: Too Soon For Reliance Worldwide

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

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Despite a big share price fall, Citi suggests it's still not time to get back into Reliance Worldwide.

By Danielle Austin

Whose Idea Is It?

Analysts at Citi.

The subject:

A more positive long-term outlook for water flow product supplier Reliance Worldwide ((RWC)).

Since the beginning of the year Reliance Worldwide has suffered a more than -30% stock price dive, but Citi analysts have made a case for longer-term potential in the stock once the company can find a way to circumnavigate current headwinds.

According to Citi, Reliance' relationships with key US "big-box" retail customers, particularly Home Depot and Lowes, offer opportunity to leverage off the growth being pursued by said customers. With customers paying the billions in capital expenditure to grow their own footprint, and pursue the lucrative professional market, Reliance is well-place to capitalise on the investments made by retail partners.

Analysts expect strategically leveraging the growth of customers by retail partners could allow Reliance to deliver above-market, capital-light growth over a number of years. The opportunity for these retail customers to capture a larger share of the professional market offers Reliance exposure to a market with a total estimated value of US$900bn.

Strategy updates from both Home Depot and Lowes show the retailers are targeting an increased share of the professional market by pushing into wholesale and establishing offerings beyond simply immediate need purchases by trades.

With its strategy, Home Depot is targeting a 30% sales increase, and Citi notes combined the retailers make up only around 20-25% of the professional sales market which offers a significant runway for further market share gains.

While the recent share price fall could indicate a buffer for potential investors, with the stock now presenting at a -20% discount to the ASX-200 compared to a historic 10% premium, Citi warns that many peers similarly exposed to the housing market have shown similar movement. The broker anticipates this could mean housing stocks are shifting to a lower relative valuation as interest rates rise.

More info:

The broker reiterates that Reliance Worldwide does face a number of pressures that could continue to drive downside risk to current consensus forecasts in the near-term, including the high input costs and rising interest rates facing peers.

The company faces likely continuing rising input costs while also facing pricing pressure from its low-cost, large-scale retail partner Home Depot which will be looking to offer cheaper stock to target the professional market. Reliance is particularly exposed to copper pricing, which will likely see a boom in coming years given underinvestment in the resource, but without strong pricing power with retail partners the company may struggle to pass through elevated costs.  

Outside the US, the broker noted first half sales were down -8% in the United Kingdom but offset by 23% growth in Continental Europe, with the company attributing poor UK results to overstocking by retail partners in previous periods.

Citi’s Sell rating for Reliance Worldwide is at odds to the other brokers in FNArena’s core coverage, of which four are Buy-rated and two are Hold-rated. Ord Minnett, which recently upgraded to an Overweight rating from a Neutral rating, noted value in the stock since its share price fall. The broker also liked that the company has been able to deliver structural improvement throughout the pandemic which should leave it well placed for either an upswing benefit or to avoid a slowdown as recovery continues.

Since listing in 2015, Reliance Worldwide shares have had a mixed fortune on the ASX. Up Until mid-2018 things seemed hunky-dory with the shares rallying from circa $2.80 to above $6 but it has taken until the middle of last year (2021) to get back to that price level on post-covid recovery and investor enthusiasm.

Since peaking nearby $6.50 last year, the shares have fallen in excess of -35% of which the bulk, circa -30%, occurred over the first three months of calendar 2022. Coincidentally, FNArena's consensus price target sits just under $6.50 so there's an argument to be made the stock had run into valuation constraints, and the rest, as they say, is history.

That consensus price target has gradually started falling as brokers updated their views and projections. Given the consensus target is effectively the simple average of all major brokers covering the stock, Citi's fresh initiation has now further deflated the consensus target to $5.77; still well above where the shares are trading.

All of UBS, Credit Suisse, Ord Minnett and Morgans currently rate the shares Buy, or an equivalent of, mostly on the same reasons as to why Citi holds a positive view longer-term. Morgan Stanley and Macquarie have a neutral view and both are, similar as Citi, not so enthusiastic about the immediate outlook.

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