Company Overview: Reece Limited (ASX: REH) is a leading supplier of plumbing, bathroom, heating, ventilation, waterworks, air conditioning and refrigeration products with operations in Australia, New Zealand and the US. The segments of the group are based on the geographical operations of the business and comprise Australia and New Zealand (ANZ) and the United States of America (USA). Reece Limited supplies customers in the trade, retail, professional and commercial markets. The Reece Group in Australia and New Zealand will continue to focus on investing in people, products, technology and customer service. In the US, the focus is on developing the long-term strategy and culture and positioning the US business to benefit from the growth opportunities in the Sun-Belt region.

REH Details
 


Record Sales Revenue and Strong Balance Sheet: Reece Limited (ASX: REH) is a leading supplier of plumbing, bathroom, heating, ventilation, waterworks, air conditioning and refrigeration products with operations in Australia, New Zealand and the US. As on 30 March 2020, the market capitalization of the company stood at $4.97 billion. FY19 has seen the focus of Reece Group on integrating on a global scale with continued growth in the leading market position in the ANZ region. The company continued to witness growth in sales revenue and achieved record sales revenue of $5.5 billion in FY19 despite challenging environment where the housing market has come off record highs. This was mainly driven by the acquisition of MORSCO and record sales revenue in ANZ. During FY19, the company also reported record normalized EBITDA of $522 million, up by 38% on pcp, with an increase of 6% in normalized NPAT to $238 million. The decent financial performance of the company enabled the Board to declare a fully franked final dividend of 14.25 cents per share, bringing the total dividend to 20.25 cents per share. REH continued to deliver world-class customer experience while working with the US colleagues for building a growth strategy for the US Sun-Belt region and gained a deeper understanding of the US business via the integration of MORSCO. The company has also cemented its presence in New Zealand through the integration of Heatcraft NZ and Edward Gibbon into the Reece Group, providing customers with a more reliable and wide-reaching offering which is essential for growth. The company has also reported a strong balance sheet which will help in paying down the debt facility used to acquire MORSCO. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR (Compound Annual Growth Rate) of 27.23% in revenue and a CAGR of 22.28% in gross profit. 

The company has recently declared its interim results for the period ended 31 December 2019 wherein it reported record sales revenue and laid the foundations for growth for the coming years. The company also managed to maintain its competitive advantage in Australia and New Zealand through investment in technology and innovation.

Reece group continues to deliver strong results and long-term value as a global company and is embracing change with digital transformation across every part of the business. The company is expanding in both Australia and New Zealand and the Sun-Belt region of the US. It is leveraging its leadership and is capitalizing on opportunities to drive future growth. 


FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Reece Limited. L.T. Wilson Pty. Ltd is the largest shareholder in the company, with a percentage holding of 28.03%. 


Top 10 Shareholders (Source: Thomson Reuters)

Increasing Profitability and Decent Liquidity Levels: During 1H20, the company witnessed a slight increase in gross margin and EBITDA margin over the previous half, which stood at 28% and 10.5%, up from 27.8% and 9%, respectively. The improvement in gross margin and EBITDA margin indicates that the company is managing its costs well and is capable of converting its revenue into profits. In the same time span, net margin of the company was 3.5%. During 1H20, Return on Equity of the company stood at 5.2%, higher than the industry median of 4.3%. This indicates that the company is well managing the capital of its shareholders and is capable of generating its profits internally. In the same time span, current ratio of the company stood at 2.2x, slightly higher than the industry median of 2.17x. This indicates the company is liquid enough to pay off its current liabilities using its current assets.


Key Margins (Source: Thomson Reuters)

Completion of Todd Pipe Acquisition: The company has recently announced that it has acquired the plumbing supply wholesaler of Southern California, Todd Pipe & Supply, LLC, for a consideration of US$122 million, with a further US$38 million deferred until 31 December 2021, subject to achievement of certain  milestones. This brings the total number of branches in Southern California to 23. Following the recent business acquisitions, Reece Group has grown its international logistics and supply chain network to support the growing branch network in Australia, New Zealand and the United States. The company is working closely with suppliers to manage and mitigate the risk to supply chain capabilities.

The company has also acquired a leading US distributor of plumbing, waterworks and heating and cooling products, MORSCO. REH has developed short and long-term incentive programs with the dual purpose of employee retention through the transition phase and stretch targets for the long-term growth of the MORSCO business.        

Decent Growth in Sales Revenue and Addition of New Stores: The company has recently released its interim results for the period ending 31 December 2019 wherein it reported record sales revenue of $2,962 million, reflecting a growth of 9% on 1H19. In the same time span, normalized EBITDA went up by 20% to $313 million, and statutory NPAT grew 37% to $105 million. During the first half, MORSCO added eleven stores to its network, bringing the total to 186, including six from the acquisition of Todd Pipe. ANZ footprint was expanded through the addition of five new branches, bringing the total to 639. In Australia and New Zealand, Reece continues to deliver customized service by providing quality products and building strong relationships and expertise. The Board has declared a fully franked interim dividend of 6 cents per share which was paid on 26 March 2020.  

During 1H20, US sales revenue grew by 19% and by 9% on a like-for-like, constant currency basis whereas ANZ sales revenue remained flat in a softening market. The company is laying the foundations for growth in the US platform by digitization and innovation and investing in People & Leadership.


1H20 Financial Highlights (Source: Company Reports)

Future Expectations and Growth Opportunities: As the companies are entering a more challenging environment, Reece Limited is exploring new growth opportunities and is focused on strengthening its business model. The company is also targeting long-term success with stable and consistent shareholder returns. The Australian business of the company has continued to perform well in a slowing environment and is also building on its market-leading position while growing into new market segments. The company is expanding its footprint across the globe and is leveraging its industry-leading technology, expertise and service across the Reece Group to build market share. REH’s commitment to persistent improvement is the key driver of its success to date. The key focus of the company is on an innovation centre NEXT in Collingwood, which will help it to secure its future by enhancing innovation capability, empowering people to solve problems and create new ideas. 


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation Approach

EV/Sales Multiple Based Relative Valuation Approach (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock of REH is inclined towards its 52-weeks’ low level of $7.750, proffering a decent opportunity for accumulation. The company is focused on specific strategic priorities, reflecting its innovation methodology. REH is building relationships with a new breed of partners and suppliers and is creating innovative experiences for its customers and opportunities for the business. Considering the trading levels, improvement in margins, decent financial performance and modest outlook, we have valued the stock using EV/Sales based relative valuation method and have arrived at an indicative target price offering an upside of lower double-digit (in percentage terms). For the said purposes, we have considered Seven Group Holdings Ltd (ASX: SVW), Reliance Worldwide Corporation Ltd (ASX: RWC), Adelaide Brighton Ltd (ASX: ABC), etc. as peers. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of $8.980, up by 1.354% on 30 March 2020. 

 
REH Daily Technical Chart (Source: Thomson Reuters)

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