Company Overview: Reliance Worldwide Corporation Limited (ASX: RWC) is engaged in the design, manufacture and supply of water flow and control products and solutions for the plumbing industry. It is one of the leading manufacturers of water delivery, control, and optimization systems for the modern built environment in Australia. The company creates and innovates plumbing products for commercial, residential, and industrial applications and has distinctive end-to-end meter to fixture and floor to ceiling plumbing solutions, which target the repair, renovation, service, new construction and remodel markets. RWC manufactures and distributes products that disrupt and transform traditional plumbing methods with an aim to make the end user’s job quicker and easier and is one the leading manufacturers in the world of brass Push-to-Connect plumbing fittings.


RWC Details

 
Significant Increase in NPAT and Strong Cash Generation: Reliance Worldwide Corporation Limited (ASX: RWC) is engaged in the design, manufacture and supply of water flow and control products and solutions for the plumbing industry. As on 22 June 2020, the market capitalization of the company stood at ~$2.47 billion. During FY19, the company progressed well in bedding down the acquisition of the John Guest Group. With the addition of John Guest, RWC is a much more robust business and sustains a diverse group of businesses. During the year, it reported record revenue of $1,104 million, reflecting an increase of 43% on the previous year and witnessed a growth of 79% in operating earnings to $243 million. In the same time span, NPAT went up by 102% to $133 million, which resulted in an increase of 38% in earnings per share. The company continued to conservatively finance its activities to maintain a healthy balance sheet. During the year, the company reported an increase in net debt to $427 million, reflecting growth in business activities, including capital expenditure, and working capital changes. During FY19, the Board declared a fully franked dividend of 9 cents per share, representing a payout ratio of 53% of net profit after tax.

During 1H20, the company reported positive growth rates and strong cash generation despite a challenging market backdrop. The company continued to improve its operational performance and reported strong core businesses. It delivered on its business opportunities and is targeting additional prospects. RWC is at the forefront, gaining traction. It has developed the platform for a smart plumbing system that will lay across its full product offering, from the meter to fixture and floor to ceiling. Over the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 25.03% in revenue and a CAGR of 27.47% in gross profit. This reflects the company’s ability to leverage additional volume through new channels and existing distribution base.

The company intends to invest in various capabilities ranging from development and commercialization of the new products, improvement in operational performance and core group capabilities. It is optimistic about the future of the core businesses and is expecting growth opportunities from new products. RWC is expecting to achieve decent growth rate for its SharkBite PTC business in North America.

FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Reliance Worldwide Corporation Limited. Bennelong Australian Equity Partners Pty. Ltd. is the largest shareholder in the company, with a percentage holding of 15.66%.   


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Increased Profitability and Financially Stable Balance Sheet: During 1H20, gross margin of the company witnessed an improvement over the previous half and stood at 42.9% from 41.5% in 2H19. In the same time span, EBITDA margin of the company stood at 23.5% as compared to the previous half margin of 21.8%, indicating increased profitability. The improvement in the gross and EBITDA margin indicates that the company is managing its costs well and is capable of converting its revenue into profits. During 1H20, assets/equity ratio of the company stood at 1.49x, down from 2.62x in 1H18 and debt/equity ratio witnessed a decline from 1.17x to 0.28x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. In the same time span, Return on Equity of the company was 3.5%, and current ratio stood at 2.91x.


Key Margins (Source: Refinitiv, Thomson Reuters)

Decent Increase in Net Sales and Reduction in Net Debt: During 1H20, the company reported an increase of 5% in net sales to $569.3 million. The growth rate was highly influenced by currency translation effects. During the half-year, RWC reported EBITDA of $126.3 million and NPAT of $50.1 million. In the same time span, the company realized synergies of $12.3 million from the acquisition of John Guest and is on track to exceed $30 million on a run rate basis by the end of FY2020. It procured various initiatives and made continued improvement in several aspects, delivering cost reduction benefits of $1.5 million and generated strong cash of $112.8 million from operating activities, reflecting an increase of 163% on pcp. During the half-year, the company reduced its net debt by $31.9 million to $394.7 million, resulting in a strong balance sheet. It also reduced leverage with Net Debt/EBITDA Ratio down to 1.57x from 1.67x earlier. The company continued to invest in new product development and commercialization and is confident in the potential for the long-term success of these new products.


1H20 Debt Metrics (Source: Company Reports)

Key Risks: While there has been no significant deterioration in demand for RWC’s products, economic forecasts are indicating a decline in new housing construction in Australia next year. The Group is also exposed to economic sustainability risks associated with its business activities. Manufacturing operations primarily involve the use of heavy machinery and hazardous processes, the interruption of which may adversely impact business reputation.

Future Expectations and Growth Opportunities: RWC has solid core businesses across its important markets of the USA, Australia, and the UK. The company retains a strong and robust balance sheet with diverse business across end-users, geographic reach, product, channels, raw materials, and technology. It has the ability to grow the business ahead of the market and possesses strong fundamentals.  The company has placed its focus on its core customers and is recalibrating its approach to new products and solutions. RWC will continue to engage in opportunities that will further drive efficiency enhancements and will optimize the manufacturing footprint. The company continues to closely monitor the manufacturing volumes for meeting the demand. Given the rapidly changing COVID-19 situation, RWC maintains a global supply chain and robust inventory positions and is confident in its ability to service customer needs. The company has significant funding lines to manage its working capital and cash flow requirements. Despite the global pandemic, the manufacturing operations of the company were unaffected in North America. The company has not witnessed any material impacts from delays in the sourcing of components or finished goods.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The company has had a history of stronger returns and has accelerated growth in core repair and maintenance markets. Despite several economic headwinds, the company achieved decent results. As per ASX, the stock of RWC gave a return of 56.5% in the past three months and a return of 19.47% in the last one month. We have valued the stock using the Price to Earnings multiple based illustrative relative valuation approach and have arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the attractive returns in the past three months, record financial performance in FY19, resilience of the business despite the gloomy economic environment and upcoming growth opportunities, we recommend a ‘Buy’ rating on the stock at the current price of $3.14, up by 0.319% on 22 June 2020.

 
RWC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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