Reece Limited

REH Details

Business Update: Reece Limited (ASX: REH) provides customer services like plumbing, waterworks and HVAC-R products and has its footprint in Australia, New Zealand and the US. The market capitalisation of the company, as on 07 May 2021, stood at ~$ 13.70 billion. As per a recent update, the board announced a fully franked interim dividend of 6.0 cents per share recorded on March 30, 2021.

Change of Director’s Interest: The Director of the company, Peter John Wilson has undergone a change of interest in the company recently and has acquired 571,874 options.

H1FY21 Performance Update: During the period, the company reported improved financial metrics where the revenue rose by 4% to ~$3,074 million in H1FY2021 from ~$2,962 million in the previous corresponding period. The US segment reported an increase of 1% in sales to ~$1,509 million in H1FY2021. This resulted in an increase in the Net Profit by 17% to ~$123 million in H1FY2021 vs ~$105 million in H1FY2020. The EBITDA Margin showed a significant expansion of 81 bps to 11.4% during the period.

H1FY21 Financial Performance (Source: Company Reports)

Outlook: The company plans to provide customised services in a digital landscape to create a better customer experience and blend new stores face-to-face experience. The digital exposure, optimistic management commentary, and boom in the housing market, resulting in a surge in demand for its offering, could strengthen the second-half performance.

Key Risk Investment: The onset of the COVID-19 pandemic might have an impact on the demand for the company’s services and offerings. This may impact the profitability of the company in the short term.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, 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 company reported a cash position of ~$954 million in H1FY21, a decrease from a level of ~$1,005 million in FY20. The stock of REH is trading close to its 52-weeks’ levels of high of $21.620. The stock of REH gave a positive return of ~158.15% in the past one year and a positive return of ~103.67% in the past nine months. On a technical analysis front, the stock of REH has a support level of ~$19.97 and a resistance level of ~$21.614. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a correction of low double-digit (in % terms). We believe the company can trade at a slight premium to its peer average EV/Sales (NTM Trading multiple), considering the impressive financial performance and an improvement in EBITDA margin. For the purpose, we have taken peers such as Seven Group Holdings Limited (ASX: SVW), Emeco Holdings Limited (ASX: EHL), Coventry Group Limited (ASX: CYG), to name a few. Considering the current high trading levels, recent rally in the stock price and decrease in cash position, we suggest investors to book profits and give a ‘Sell’ rating on the stock at the current market price of $21.040, down by 0.802% as on May 7, 2021. 

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

Note: 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.

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