An emerging opportunity with GWA

Shares in GWA Group (ASX:GWA) have pulled back during the last few months and seem to be finding support after their recent AGM. Are we seeing a buying opportunity emerge?

GWA is a designer, importer and distributor of bathrooms and kitchen brands and products across Australia and NZ. It is also a designer, manufacturer, importer and distributor of a comprehensive range of access and security systems and door hardware products. After undertaking assets sales and restructuring, the Company now operates two divisions: Bathrooms & Kitchens, which generates around three quarters of the overall revenue base, and Doors & Access Systems.

Over 50% of the Company’s revenue base is derived from the Renovation & Replacement segment of the building market, around one-third from new housing and ~15% from the Commercial segment.

Investor concerns

Recently, the share price has twice recovered from lows of ~$2.50 per share. The recent share price decline was from a high of around $3.20 – around the time it released its full year results for FY17 in August. The reasons for this decline are very clear – slowdown in the domestic construction market is expected. Investors may have a concern that while GWA has late-cycle exposure, the outlook for declining detached housing and multi-residential approvals is expected to impact revenue in FY18 and beyond. And as such, organic growth becomes harder to generate.

What is the company doing about it?

While GWA does have exposure to slowing market conditions, the Company is in a position to both mitigate and prolong the potential impact. A lot of this comes from internal initiatives. This includes new product development that is focused on the Renovations & Replacement segment; improved market share on the core focus segments in the Bathrooms & Kitchens division; and cost savings. This is where GWA is targeting $13-15m in cost savings by FY19, through a combination of reductions in Selling, General & Administration costs and supply chain efficiencies.

Our view of GWA

But let’s put GWA’s expose to the slowing domestic construction market in context. The Company has highlighted that multi-residential activity (i.e. medium and high-density dwelling completions) is not a core focus for the group. And hence the impact on the Company from the downturn in that market would be minimised. GWA now considers its core categories to be the Renovations & Replacements, Commercial and Detached Housing segments. Accordingly, the current level of exposure to medium and high-density dwelling completions (~11% of revenue) is also much lower than in recent years. This is where GWA’s products were skewed towards activity in medium-to-high density dwellings. At the recent AGM, while there weren’t any positive surprises, there weren’t any negative ones either. This should therefore be a relief to the market. The shares are trading at a discount to their historical P/E and yield nearly 6% plus franking. We may therefore see some support for the shares at current levels.

Does the chart back this up?

At the end of October, the shares tested the January low before bouncing off it nicely, which is a good sign. Volume also came in at the low which adds to the feeling that it is a strong support level. What we need to see now is either a higher low or a higher high form to give us confidence that the downtrend from the last few months is ending. GWA is therefore one to watch here over the next several days or so.

Daily chart of GWA
Daily chart of GWA

Click here for the current GWA share price.

Michael Gable is managing director of Fairmont Equities.

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