Reliance Worldwide Corporation Limited

RWC Details

Reliance Worldwide Corporation Limited (ASX: RWC) caters to the building materials and the construction industry. It offers water flow, control and monitoring products, and plumbing fittings and solutions. The company operates in segments namely, Asia Pacific, Americas, and EMEA.

H1FY22 Result Spotlight:

• Net sales witnessed a 12% YoY growth to US$521.8 million driven by growth across geographies. Americas showcased a 15% uptick in sales and the Asia Pacific with a 10% growth over the last year.
• Repair and remodel markets showed resilient performance, while new housing construction underpinned strong growth.
• RWC experienced a shortage of materials and shipping delays impacting manufacturing efficiency.
• It had opened a new distribution centre in Alabama during the period.
• Its adjusted EBITDA stood at US$125.5 million, an increase of 5% over the prior year. But EBITDA margin dived 120 bps due to the impact of the price increase.
• Its reported NPAT fell 3% over the prior year to US$63.7 million as a result of the pandemic and supply chain disruptions.
• The surge in working capital requirements constraint the operating cash flows to reach US$60.0 million, down from US$112.4 million posted in H1FY21.
• Debt increased as a result of the LCL and EZ-FLO acquisitions. Net debt stood at US$545.3 million as of December 31, 2020, as compared to US$174.2 million last year.
• It had closed the period with a cash balance of US$26.4 million.
• RWC declared an interim dividend of US 4.5 cps, representing a payout of 56% of reported NPAT.
• As announced on March 01, 2022, Bennelong Funds Management Group Pty Ltd. reduced its voting rights from 10.9086% to 9.6704%.
• On February 24, 2022, Aware Super Pty. Ltd. has picked up 5.05% voting rights and become a substantial shareholder.

Key Financial Highlights (Analysis by Kalkine Group)

Key Risks: RWC witnessed a drop in margins as a result of shipping delays and supply chain disruptions. Cyclicality in the construction industry may impact cash flows. RWC derives worldwide revenues, exposing it to forex risks.

Outlook: RWC is optimistic that increasing demand for home remodelling activity will lift up revenues in FY22. Acquisition of EZ-FLO business to boost EBITDA in Q4FY22, following the plans to raise prices. Operating cash flows to improve in H2FY22 as the company built-up inventories in the first half. It had completed the realignment of warehousing in EMEA in a measure to improvise margins.

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 has been corrected by ~23.82% in the past three months. The stock is trading below to its average of the 52-weeks’ low-high price band of $4.060-$6.610. The stock has been valued using the P/E-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers, considering the diverse geographical footprint and uptick in revenues despite the pandemic in H1FY22. For this purpose of valuation, a few peers like Boral Ltd (ASX: BLD), James Hardie Industries PLC (ASX: JHX), and Reece Ltd. (ASX: REH) have been considered. Considering the traction in home remodelling activity, EBITDA expansion, the scope for price rise, synergies from the acquisition of EZ-FLO, indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $4.635 as of 01 March 2022, 12:18 PM (GMT+10), Sydney, Eastern Australia. 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.

RWC Daily Technical Chart, Data Source: REFINITIV  

GWA Group Limited

GWA Details

GWA Group Limited (ASX: GWA) provides bathroom, kitchen, laundry products, and heating and cooling systems. Through its distribution channels, the company caters to Australia, New Zealand, the United Kingdom, and China.

H1FY22 Performance Spotlight:

• Australian market proved resilient with a 6% uptick in sales in H1FY22 over the prior year. International markets were weakened by the pandemic. New Zealand declined 15%. Overall revenues were up 2% YoY to reach $201.3 million.
• Normalized EBIT inclined by 11% to $35.6 million driven by price rise and volume mix.
• Operating cash flows dipped to $43.6 million (vs. $49.7 million in PcP) due to inventory built up to offset supply chain challenges.
• GWA made free cash flows of $18.1 million despite capex nosedived to $1.6 million, due to an increase in restructuring costs.
• Net debt broadly remained in-line at $104.0 million and the gearing ratio slightly fell to 21.2% in contrast to 21.5% in H2FY21.
• GWA refinanced banking facility with total facility reduced to $220 million.
• On February 18, 2022, Perpetual Limited had increased its voting rights in GWA from 5.08% to 7.49%.

Key Financial Highlights (Analysis by Kalkine Group)

Key Risks: GWA is exposed to forex risk with revenues all around the globe. Changes in buying habits and demographic split may affect volume growth. Shortages of domestic pallets impacted the operation. Shortages and delays in raw materials may affect working capital requirements.

Outlook: GWA is strong momentum to continue in 2HFY22. Repairs and renewals activity in the residential and commercial segments to remain positive. GWA intended to increase prices by 4% which helps to offset freight costs. It is anticipating 2HFY22 normalized EBIT to be higher than 1HFY22.

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 ~7.0% in the past three months. The stock just recovered from its 52-weeks’ low price of $2.250. The stock has been valued using the P/E-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium than its peers, considering the diversified portfolio and strong volume growth in the Australian market. For this purpose of valuation, a few peers like Fletcher Building Ltd. (ASX: FBU), Reliance Worldwide Corporation Ltd. (ASX: RWC), Metro Performance Glass Ltd. (ASX: MPP), and others have been considered. Considering the decent revenue growth in H1FY22, optimistic outlook, increase in NPAT, indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $2.295 as of 01 March 2022, 10:50 AM (GMT+10), Sydney, Eastern Australia. 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 decision 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 Valuation has been achieved and subject to the factors discussed above.

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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