Company Overview: GWA Group Limited (ASX: GWA) is engaged in the research, designing, import and marketing of building fixtures and fittings to residential and commercial premises. The company is also involved in the distribution of various products via a range of distribution channels in Australia, New Zealand, the United Kingdom, and China. The company was listed on ASX in May 1993.

GWA Details

Focus on Disciplined Cost Management to Aid Future Business Growth: During 1HFY22, the company continued its centres of excellence in Auckland and Sydney, backed by the roll-out of new products, including taps, showers, accessories and sanitaryware to support its offering. The company is focused on managing operational costs in a disciplined manner and managing its working capital and cash flow accordingly. This was evident by improved financial performance in 1HFY22, which included a strong uplift in EBIT margin and increased dividend despite the global freight disruptions. The company is continuing to generate stronger momentum in 2HFY22 and is also focused on achieving solid progress in establishing the groundwork for implementing its strategy for future growth. With respect to the commercial segment, the company would continue its focus on areas which provide near term growth opportunities, including education, aged care and commercial renovation and replacement.

Insights of 1HFY22: During 1HFY22, the company experienced an improvement in Australian market activities, as evident by a growth of 2.1% in revenue. GWA’s financial position is decent, marked by its improving leverage ratio to 1.3x.

Financial Summary (Source: Analysis by Kalkine Group)

Business Updates: The below picture provides a broader overview of the valuable business updates:

Business Updates (Source: Analysis by Kalkine Group)

Segment Highlights: The following picture gives an idea of the company’s segmental performance in 1HFY22:

Segments Highlights (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 39.85% of the total shareholding, while the top 4 constitute the maximum holding. Perpetual Investment Management Limited and The Vanguard Group, Inc. are holding a maximum stake in the company at 7.49% and 5.55%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During 1HFY22, the company recorded a cash cycle of 168.9 days against 171.4 days in 1HFY21. On the leverage side, the debt-to-equity ratio for the period stood at 0.67x as compared to 0.83x in 1HFY21.

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

Key Risks:

• Supply Chain Issues: The company’s operational and financial performance could be affected by unforeseen disruptions from offshore suppliers.
• Shortage of Key Elements: GWA is exposed to risk arising from the shortages in containers, components and raw materials and domestic pallet.
• Forex Headwinds: Any adverse movement in the foreign currency could impact the company’s financial health as it operates in multiple geographies.

Outlook: The company seems to be in a decent position to capitalise on current improving market conditions. GWA believes that Renovation & Replacement (R&R) in Residential/Commercial activity is likely to be positive and optimistic about the continued momentum in residential detached completions in the near future. In addition, the price increase of 4% (effective from Dec-21) in Australia is likely to offset increased freight costs. GWA is on track to deliver annualised supply chain savings of $3 million from FY22, with $2.0 million achieved in 1HFY22. The company expects Normalised EBIT in 2HFY22 to be higher than 1HFY22, which is subject to any further potential impact on the general economic environment. The company maintains strong operational leverage to the market upturn, supported by ongoing operational discipline.

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 is trading near its 52-week low level of $2.180, offering a decent opportunity for accumulation. The stock has been corrected by ~5.83% in the past month. 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 discount to its peers’ average multiple, considering the COVID-19 uncertainties and supply chain risk, 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, rising topline and bottom line, improving debt position, new products, optimistic long-term outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $2.260, down by ~0.877% as on 02 May 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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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