By the middle of this year, Reliance Worldwide Corporation (ASX:RWC) had seen its share price double in the less in 2 years. However, it has fallen away in the last few months. Can the share price get back to its winning ways?
About Reliance Worldwide
Reliance Worldwide Corporation (RWC) is a global designer, manufacturer and supplier of premium-branded water flow and control products. These products are typically used by end-users such as plumbers/contractors. The customers purchase RWC’s products (either as individual products or in combination with other products as plumbing solutions) through a number of distributors. This includes wholesalers and retailers, through their physical and online stores.
The Company was the first to introduce a full range of Push-To-Connect (PTC) fittings to the US plumbing industry, through its premium SharkBite brand in 2004. PTC fittings allow lengths of pipe to be connected through a rapid push-on connection mechanism, without the need for soldering, clamps/rings, glue or tools.
The key change to the RWC business since our last report was the acquisition of UK-based John Guest in June 2018 for $1.2b. This acquisition expanded the Company’s manufacturing and distribution of both brass and PTC technology and related products. It has expanded the Company’s operations and led to a greater geographical spread. Earnings from both the Americas division and John Guest acquisition are expected to contribute 39% of group earnings. Prior to the acquisition of John Guest, the Americas division accounted for around two-thirds of group earnings.
Margin Growth In Americas Division Likely To Be Delayed
The Americas division reported a flat EBITDA margin result in FY18. This was a disappointment, as the market had expected greater benefits from scale and mix in FY18. There is potential for the EBITDA margin to improve in FY19 as a result of synergies and the phasing of import duty charges. However, the real opportunity to improve overall margin comes from the distribution higher-margin Holdrite products. RWC aquired Holdrite in June 2017. While the Company commented at the interim result that there were “margin benefits from inclusion of higher-margin Holdrite products”, there does not appear to be evidence of an improvement in the full year EBITDA margin.
Further, Holdrite’s products, together with RWC’s EvoPEX product (which is a PTC product aimed at the new construction market where RWC has been traditionally under-represented) forms part of RWC’s expansion strategy into the US residential and commercial new construction markets. However, such a strategy relies on at least a stable US housing sector. The deteriorating conditions in the US housing market mean that the rollout of EvoPEX/Holdrite products (and hence the EBITDA margin benefit) is likely to be delayed.
Potential Upside to FY19 Guidance
At the AGM in late October 2018, Reliance Worldwide reaffirmed FY19 underlying EBITDA in the range of $280-290m, which is nearly double that of FY18 as a result of the inclusion of the John Guest acquisition. The guidance assumes an average copper price of US$6,500/t and that other input costs remain largely unchanged. While the FY19 guidance was weaker than expected, lower copper prices on average (copper prices have remained below US$6,500/t since mid 2018) and a weaker A$ (against the US$ and British Pound (£)) may present a tailwind to FY19 earnings guidance.
However, it is worth noting that the potential tailwinds are already factored into consensus estimates for FY19, which are presently above the higher end of guidance.
Notwithstanding the recent retracement in the share price, we take a cautious view on Reliance Worldwide for the above reasons. We also note that the John Guest acquisition presents a risk for RWC, given the size of the business acquired and the fact that the integration of John Guest is still at a relatively early stage.
Reliance Worldwide had been showing signs of a strong uptrend until late August when it gapped down. The shares have struggled since then. They have now come back to fill a gap made in May. This may led some support so we need to first see signs that it does want to rally from here. RWC is still in a downtrend so investors who are looking to buy are advised to wait for further signs of support, and preferably a break of the recent downtrend.
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Michael Gable is managing director of Fairmont Equities.
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