Reece (ASX:REH) results for the six months to 31 December 2025 (1H26) were better than expected and led to a recovery in the share price. This is despite the Company noting that ongoing affordability and consumer sentiment challenges are expected to impact activity in ANZ and the US.
We recently researched the Company in The Dynamic Investor to assess whether the more recent weakness presents an attractive entry opportunity.
About Reece
Reece is a specialist wholesaler of plumbing, waterworks, heating, ventilation, air-conditioning and refrigeration products. Reece’s products are used in residential, commercial and infrastructure applications. In 2018, Reece acquired Morsco, the US distributor of plumbing, waterworks and HVAC-R products, to expand its presence internationally.
The Company reports its results across two segments: Australia & NZ (ANZ) and the US, which account for 68% and 32% of EBIT, respectively. REH currently has 680 branches across Australia & NZ (Aust: 639; NZ: 41) and 268 branches in the US (predominantly in the southern states).
Key Fundamental Drivers
Volume Recovery in Australia & NZ Segment to be Gradual
The ANZ business remains a mature business and has the largest share, at ~50% vs ~20% for its closest competitor. As such, any growth is predominately driven by market volumes. REH is seeing signs of a gradual recovery emerging in ANZ. However, performance remains mixed across the Australia states, with Victoria the key laggard.
While REH is a late-cycle beneficiary of improved housing activity, that a material recovery in housing activity is not expected in the short-to-medium term. The current higher interest rate cycle. In addition, home loan repayments as a share of income remain extremely high (at ~40% of gross household income). Further, it is worth noting that RBA interest rate cuts in February & May 2025 did not materially translate to improved housing activity in the subsequent months.
Challenging Conditions in US Segment Likely to Persist
The Company attributed recent margin compression in the US segment to a combination of several factors. These include operational investment at the branch level, volume declines in the US and the impact of recently-opened stores. With store openings expected to moderate from 2H26 (REH continue to see a 10-15 branch per annum rate of growth vs +19 new stores in 1H26), 1H26 represents peak drag on reported EBIT margins.
However, an improvement in EBIT margin from new store openings is a medium-term proposition. A new branch reaches EBIT breakeven by year 3-4 (which is consistent with the Company’s stated payback parameters) before progressing towards mature store margins through years 4-5.
In terms of the outlook, ongoing affordability and consumer sentiment challenges are expected to impact activity. In the US, still-elevated mortgage rates and housing affordability pressures continue to hamper single and multi-family housing construction.
We consider that growth is constrained by the difficult market conditions (ongoing affordability pressures, weak new construction activity and increased competition). Also, recent peer commentary indicates expectations for little-to-no change to market conditions for this calendar year. Aggregate guidance suggesting low-single-digit % decline in housing starts and a flat repair & remodel (R&R) market.
Higher Gearing & Lower Liquidity Reduce Merger & Acquisition Opportunities
Gearing (on a net debt to EBITDA basis) as at 31 December 2025 increased to 1.5x, from 0.8x as at 30 June 2025. In context, the gearing level remains moderate.
The Company has $774m in liquidity available for growth opportunities, including Merger & Acquisition (M&A) activity. Having said that, we expect further M&A activity to be placed on hold given i) The available liquidity has declined significantly over the 1H26 period (from $1.21b as at 30 June 2025), ii) Volume-related challenges remain across both segments and ii) Recent tech businesses acquisitions have resulted in limited revenue accretion and the dilution to profitability from new stores opened/acquired in the recent past is limiting EBIT margin accretion.
Fundamental View
We highlight several factors supporting a cautious view on REH:
i. Unappealing valuation metrics – The recent retracement in the shares now sees REH trading on a 1-year forward P/E multiple of ~26x, which is below the long-term average of ~30x. The current multiple is also unappealing in the context of an EPS growth profile of +12% over FY25-28 on a CAGR basis.
ii. The prospect of a long-dated recovery in US volumes and margin
iii. Reduced balance sheet capacity, volume growth challenges in both segments and the dilutive impact on margin from the store rollout program limit the prospects for further EPS-accretive acquisitions.
iv. The prospect of further volume pressure in the ANZ segment on the back of higher interest rates and continued subdued market conditions, noting that volumes are the key driver of sales and margin for the ANZ segment.
Charting View
When we last looked at REH in early July in The Dynamic Investor, we noted the downtrend and commented that “at best, we can see this drifting sideways for a while.” As we can see, it has indeed gone nowhere in that time. The rally in February has also see it fail to follow-through and the stock has formed another “lower high” on the weekly chart. REH is therefore at risk of falling further towards $12 in the short-term.
Michael Gable is managing director of Fairmont Equities.
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