Company Overview: Reliance Worldwide Corporation Limited (ASX: RWC) is engaged in designing, manufacturing and supply of high quality, reliable and premium branded water flow, control and monitoring products and solutions for the plumbing and heating industry. The company carries out its operations through three segments Americas (Including the USA and Canada), Asia Pacific (Australia, New Zealand, Korea and China) and EMEA (the United Kingdom, Germany, Spain, Italy, Poland, France and the Czech Republic).

RWC Details

Rising Products Demand and Cost Saving Initiatives to Aid Future Growth: RWC is one of the leading manufacturers in the world of brass Push-to-Connect (PTC) plumbing fittings. Backed by the acquisition of EZ-FLO International in November 2021, the company is now placed as one of the leading service providers of major appliance installations, including plumbed appliances, gas, hot water, and dryer venting. RWC is focused on cost reduction initiatives, which delivered savings of $3.1 million in the 1HFY22, and the company expects cost savings run rate of $10 million in FY22. The company’s growth strategy revolves around providing smart product solutions, increasing value for the distributors and operational excellence. RWC is focused on M&A opportunities for pursuing organic growth initiatives. In addition, it is also focused on the capital management approach, whereby it aims to optimise the cost of capital and ensure ongoing access to funding to match future requirements. On the back of rising home remodelling activity and higher levels of new home construction, the demand for its products is rising, which signals a decent outlook in the long run.

1HFY22 Operational and Financial Summary: During the half-year ended 31 December 2021, the company experienced robust market conditions and demand for its products.

• The company recorded revenue amounting to US$521.8 million, reflecting a rise of 12% over pcp, backed by price increases, new product revenues, and core volume growth in some regions.
• Adjusted EBITDA for the period rose by 5% to US$125.5 million, and Adjusted EBITDA margin stood at 24.1%, which indicates the inclusion of EZ-FLO as well as lagged effect of the increase in prices to offset the rising cost.
• Reported NPAT for the half-year went down by 3% to US$65.9 million, which brought EPS to 8.1 cents per share against 8.4 cents per share in 1HFY21.
• During the period, the company established a new committed borrowing facility with a group of lenders to US$800 million, which comprise US$725 million of the syndicated multi-currency facility; and US$75 million of bilateral US dollar facility.
• RWC declared an interim dividend of US4.5 cents per share, which will be paid in Australian dollars at 6.285 cents per share at a record and payment date of 11 March 2022 and 8 April 2022, respectively.

Revenue & Adjusted EBITDA (Source: Analysis by Kalkine Group)

Segments Performance:  During 1HFY22, the company witnessed decent growth across all its business segments as depicted in the below picture:

Segment Performance (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 50.54% of the total shareholding, while the top 4 constitute the maximum holding. Bennelong Australian Equity Partners Pty. Ltd. and AustralianSuper. are holding a maximum stake in the company at 10.91% and 10.90%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During FY21, the company recorded an EBITDA margin of 26% as compared to the industry median of 23.4%. It posted a current ratio of 2.03x in FY21 as compared to the industry median of 1.56x. Cash cycle for the year stood at 148.5 days in FY21 against 161.2 days in FY20. On the leverage side, the company recorded a debt-to-equity ratio of 0.13x in FY21 as compared to the industry median of 0.36x.

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

Key Risks:

• Supply Risk: The company’s business is exposed to supply chain issues relating to shipping and freight delays, materials shortages, and construction sector delays.
• Loss of Customer: There is no guarantee that the key customers would continue to purchase the same or similar quantities. Hence, the loss of any of its key customers or a significant reduction in the volume could impact the business growth.
• Forex Headwind. The company is exposed to risks arising from the fluctuation in the foreign currency as it has operations in multiple geographies.

Outlook: Looking forward, the company believes that the market fundamentals continue to indicate steady demand supported by the trend of increased expenditure on home remodelling activity. In addition, 2HFY22 will be supported by increased levels of new home construction and house price capital growth. The company believes that it is in a decent position to navigate supply chain challenges and respond effectively to customer needs, which will be supported by its local manufacturing operations and strong track record of class-leading customer execution. The company continues to have a decent balance sheet and conservative financial position and remains well within its target leverage ratio of 1.5 times to 2.5-times Net Debt to EBITDA.

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 RWC is trading below its 52-week low-high average of $4.060 - $6.610, respectively. The stock has been corrected by ~7.25% and ~19.76% in the past one and three months, 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 discount to its peers’ average, P/E multiple, considering the supply chain issues and other material business risks, etc. For the purpose of valuation, a few peers like GWA Group Ltd (ASX: GWA), Boral Ltd (ASX: BLD), and Adbri Ltd (ASX: ABC) have been considered. Considering the expected upside in valuation, growing revenue, rising demand for products, expected cost savings, 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 current market price of $4.920, as on 21 February 2022, ~10:30 AM (GMT+10), Sydney, Eastern Australia.

RWC 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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