Company Overview: GWA Group Limited (ASX: GWA) is engaged in the design, manufacture, and marketing of building fixtures and fittings to residential and commercial buildings. It distributes its products through a network of distribution channels in Australia, New Zealand, the United Kingdom and China. The company has one reportable segment – Water Solutions, which includes the sale of toilet suites, basins, plastic cisterns, taps and showers, baths, kitchen sinks, etc., to name a few.

GWA Details

Resilient Cash Flow Performance Owing to Prudent Cost Management: GWA Group Limited (ASX: GWA) manufactures and supplies building fixtures and fittings to residential and commercial premises. The market capitalisation of the company as on 28 June 2021, stood at ~$724.0 million. The company has continued to execute its growth strategy as the market conditions begin to improve after the peak of the COVID-19 pandemic disruption. In this regard, it has launched Germgard antibacterial glazing to its sanitary ware product suite in order to address safety and hygiene issue following the outbreak of the COVID-19 pandemic.

During H1FY21, the company reported revenues of $197.2 million, a decrease of 4.4% on the previous corresponding period on the back of weaker construction conditions in Australia. It posted an EBIT of $32.1 million with a margin of 16.3%. NPAT stood at ~$20 million during the period. It declared a dividend of 6 cents per share in H1FY21, owing to decent cash generation during the period. It ended the period with a comfortable cash position of ~$42.3 million as of 31 December 2020.

Cash Balance (Source: Analysis by Kalkine Group)

Decent Cash Conversion: The company’s focus on cash management led to a decent cash conversion from operations at ~118% in H1FY21, despite the impact of the COVID-19 pandemic on the business environment. There was an uptick in the cash flow from operations to $49.7 million in H1FY21, compared to $42.2 million in H1FY20. GWA made capital investments of $5.5 million during the period with investments on new product development, Caroma Smart Command and R&D.

Improvement in Cash Flow from Operations in H1FY21 (Source: Company Reports)

Progress on Methven Integration: The company seems to be well-progressed with the integration of business with Methven. It plans to consolidate the New Zealand distribution network from two warehouses to one, which will enable higher efficiency, and a single invoicing system is expected to enhance customers’ experience. As per the company, the sale of Methven China plant was expected to be completed in Q3FY21. The Methven shower IP finds its application in Caroma new shower products, which were launched in H1FY21.

Top 10 Shareholders: The top 10 shareholders together form around 39.14% of the total shareholding, while the top 4 constitute the maximum holding. Vanguard Investments Australia Ltd. and Martin Currie Australia are holding a maximum stake in the company at 6.01% and 5.96%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  During H1FY21, the company reported a gross margin of 39.5%, and net margin stood at 9.4%. There was an improvement in the cash cycle to 171.4 days in H1FY21, compared to 182.6 days in the previous corresponding period. However, there was an uptick in debt-to-equity ratio of the company to 0.83x in H1FY21, from a level of 0.68x in H1FY20. The total debt was at $237.3 million as of 31 December 2020, with long term debt at $194.8 million and short term debt of $42.5 million.  

Growth Profile and Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to market risks such as interest rates and foreign exchange risks. It is prone to the risk of change in cash flows due to changes in interest rates in Australia, New Zealand and the United Kingdom. It is also exposed to foreign exchange risks, with operations in New Zealand, the United Kingdom and China. GWA’s line of business also exposes it to the impact of macro-events like the ongoing COVID-19 pandemic, which has impacted its top-line performance due to trading and lockdown curbs in its key business regions. There is further uncertainty in the near term with recent lockdowns in Sydney and Darwin due to a spike in the COVID-19 cases in the regions.

Outlook: The company believes that it is well capitalised to tide through the present challenges and is poised for growth along with an uptick in economic activities. It expects an increase in the residential-detached completions, renovations and replacement activity in Q4FY21 and FY22 period. As per the management, it has maintained substantial operational leverage to take advantage of the expected improvement in the residential building cycle going forward. The commercial order bank remains strong and has grown by ~16% in H1FY21, compared to the pcp.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The company expects a total of ~$3 million in cost synergies in FY21, on the back of business synergies with Methven. As per ASX, the stock of GWA is trading below its average 52-weeks’ levels of $2.400-$3.940. The stock of GWA gave a positive return of ~1.10% in the past one year and a negative return of ~3.85% in the past one month. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer median P/E (NTM trading multiple), considering the impact of COVID-19 on the sector and further curbs imposed on few cities in order to contain the wave. For this purpose, we have taken peers such as Reliance Worldwide Corporation Ltd (ASX: RWC), Fletcher Building Ltd (ASX: FBU), Metro Performance Glass Ltd (ASX: MPP), to name a few. Considering the expected upside in valuation and current trading levels, improvement in operating cash flow, synergy with the integration of Methven, disciplined cost-saving approach and expected economic recovery, we recommend a ‘Buy’ rating on the stock at the current market price of $2.69, down by 1.50% (as on 28 June 2021, 01:16 PM (GMT+10), Sydney, Eastern Australia).

GWA Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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risks per se. Past performance is neither an indicator nor a guarantee of future performance.