Company Overview: GWA Group Limited (ASX: GWA) is engaged in the research, design, import and marketing of building fixtures and fittings to residential and commercial premises. The company is also involved in the distribution of various products through a range of distribution channels in Australia, New Zealand, the United Kingdom and China. During FY21, the company launched new ranges of taps, showers, accessories and sanitaryware, which are leveraging its centres of excellence in Auckland and Sydney.

GWA Details

Positive Market Outlook to Support Future Business Growth: The company earned a major portion of revenue from Australia (79%), followed by New Zealand (13%) and other international geographies (8%) in FY21. The company delivered an improved performance in 2HFY21, supported by its continued operational discipline and improved residential construction activity in Q4FY21. Despite the weaker market conditions, GWA continues to generate strong operating cashflow, evident by the growth of 16% to $103.1 million against $88.6 million in FY20. GWA’s capital expenditure programme is focused on growth initiatives for generating revenue-enhancing opportunities and cost efficiencies. The strategic focus of the company revolves around delivering great customer experiences, winning the plumber, enhancing after-market offerings, and focusing on strategic growth opportunities. The company is optimistic about continued momentum in residential-detached activity during FY22, which would be supported by improved consumer sentiment, increased dwelling approvals, new housing loans, higher housing turnover and Government stimulus (Home Builder).

Q1FY22 Trading Update:

• During the quarter, the company’s sales were flat as compared to Q1FY21. Despite closure of some construction site and merchant during lockdowns, Australian sales rose by 6%.
• Due to Level 4 shutdown for 5 weeks, NZ sales went down by 32%. However, there was a strong rebound in sales as restrictions were lifted in late September 2021.

FY21 Financial and Operational Highlights:

• During FY21, the company reported revenue growth of 1.8% to $405.7 million. This was underpinned by the improved residential construction activity in Australia during 2H as well as strong sales growth in the New Zealand and UK businesses.
• Group EBIT before significant items for the year fell by 4.7% to $68.5 million against $71.8 million in FY20. Net Profit After Tax before significant items stood at $42.3 million against $44.9 million in FY20.
• At the end of FY21, the company had a net debt of $104.8 million, reflecting an improvement of 28% over FY20 with a continued focus on cash management.
• The company maintained substantial headroom within a $220 million banking facility. The facility comprises of $180 million multi-currency revolving facilities and a $40 million bi-lateral facility, which will mature in October 2022.

Revenue Share (Source: Analysis by Kalkine Group)

Appointment of CFO: As announced on 13 December 2021, the company has appointed Calin Scott as Group Chief Financial Officer, who will commence his role in early 2022.

Top 10 Shareholders: The top 10 shareholders together form around 36.90% of the total shareholding, while the top 4 constitute the maximum holding. Martin Currie Australia and The Vanguard Group, Inc. are holding a maximum stake in the company at 5.96% and 5.55%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During FY21, GWA recorded a current ratio of 1.66x in FY21 as compared to the industry median of 1.56x. Cash cycle for the year improved to 163.7 days in FY21, from 177.3 days in FY20. On the leverage side, debt to equity for the year stood at 0.72x as compared to 0.89x in FY20.

Liquidity & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Supply Risk: The company’s business could be impacted by unforeseen disruptions from offshore suppliers leading to reputational damage, lower sales and loss of market share.
• Forex Headwinds: GWA’s business could also be affected by any unfavourable movement in the foreign currency as it operates in multiple geographies.
• Competition from Peers: The company’s operational and financial performance could be impacted by the rising market share of peers in the industry and changing sentiments of consumers.

Outlook: For FY22, the company would be focused on revenue growth through new product developments, joint business plans with customers, and international business growth. GWA is expecting a cost reduction of $3 million annualised from supply chain initiatives in FY22.  The price increase of ~4% in Australia (effective from 1 Dec 2021) is likely to aid business growth moving forward. In addition, it would be focused on improving the diversity of its revenue and earnings base with strong growth in New Zealand and international businesses. For generating future shareholders value, the company is working on a five-year strategy with a continued objective to be the trusted and integrated solutions partner in the delivery of sustainable water solutions for bathrooms, kitchens and laundries. For FY22, GWA is focused on generating profitable share growth through customer and consumer initiatives.

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 stock of GWA has been corrected by 8.36% and 7.35% in the past one and three months, respectively. The stock is trading below its 52-week low-high average of $2.430 - $3.940, respectively. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers’ average multiple, considering the decent cash generation business, favourable market scenario and rising geographical expansion, etc. For the purpose of valuation, few peers like Reliance Worldwide Corporation Ltd (ASX: RWC), CSR Ltd (ASX: CSR), Metro Performance Glass Ltd (ASX: MPP) and others have been considered. Considering the expected upside in valuation, improvement in net debt position, growing revenue, launch of new products, optimistic long-term outlook, plans for diversifying revenue, decent liquidity position, and current trading levels, we recommend a ‘Buy’ rating on the stock at the closing price of $2.530, up by ~0.396% as on 31 January 2022.

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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