Shares in Reliance Worldwide Corporation (ASX:RWC) have retraced from a recent high of $5.45 per share in January. This is due to concerns about weakening macro conditions in the US, which have resulted in downgrades to revenue estimates. With this in mind, we recently researched RWC in The Dynamic Investor to assess whether current levels offer value.
About Reliance Worldwide Corporation
Reliance Worldwide Corporation 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. They are purchased through a number of distributors.
The Company holds the leading market position in a number of product categories. It was the first to introduce a full range of Push-To-Connect (PTC) fittings to the US plumbing industry, through its premium SharkBite brand. 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.
Key Fundamental Drivers
Outlook Points to Challenging Trading Conditions
One of the disappointing aspects of the recent interim result was that group revenue guidance was lower than prior consensus expectations. However, this factor is largely attributed to market conditions. The macroeconomic environment is not expected to materially improve in 2H25. As such, RWC expects FY25 sales to be up mid-single digit %. This guidance reflects limited recovery in market conditions and has led to downgrades to consensus estimates, despite the Company also providing guidance for EBITDA margin improvement in FY25 (vs FY24).
The guidance for organic sales growth in FY25 to be broadly flat (excluding recent acquisitions) is commendable. The guidance also reflects its generally defensive exposure in the US (60% repair), as well as Company-specific initiatives in the APAC segment.
Margin Expansion Still Expected
In the recent interim result, EBITDA margins were higher in all regions on the back of cost savings despite the ongoing subdued volume environment. RWC is targeting further improvement in its EBITDA margin in FY25, through cost reduction and efficiency measures.
We continue to expect increased manufacturing efficiencies to support margin expansion beyond FY26. However, the Company has delayed its work assessing its manufacturing and operational footprint, given the current uncertainty in global trade.
Strategies to Mitigate Tariff Impacts
RWC noted that it has a relatively minor exposure to Cost of Goods Sold (COGS) purchased from China which are currently subject US tariffs. The Company noted that it has several options to mitigate the potential impact to earnings. These include adjusting product design and materials used, working with vendors, changing geographies of sourcing, and pricing adjustments. In light of the potential offsetting factors, the overall impact at the group level is not expected to be material.
Balance Sheet Remains Conservatively Geared
Strong free cashflow has enabled to the Company to quickly de-lever its balance sheet following the Holman acquisition. Gearing (on a net debt to EBITDA basis) declined to 1.4x as at 31 December 2024, from 1.6x as at 30 June 2024.
The current gearing level is now below the lower end of the target gearing range of 1.5-2.5x. Accordingly, there is scope for to pursue both capital management and potential Merger & Acquisition (M&A) opportunities. M&A opportunities are a key focus given that the Company has relatively small but significant market share in a fragmented industry. As noted above, commercial construction as a key growth opportunity.
In the absence of any M&A opportunities, we consider that the Company would be content with having a modest gearing position in light of uncertain market conditions from both tariffs and inflationary cost pressures.
Fundamental View
The Company remains well placed to achieve operating leverage when volumes eventually improve. This is due to progress to date on new product initiatives, cost-out measures and continued manufacturing optimisation.
We see value in the current share price, which is currently trading on a 1-year forward P/E multiple of ~14.5x. This is towards the bottom of the trading range over the last two years and below the most recent peak of ~18x in August 2024. The current multiple remains undemanding in the context of an EPS growth profile of ~18% (on a US$ basis) over FY24-27 on a CAGR basis.
Charting View
RWC rallied strongly from early July to late September. It then cooled off in what looks like a pennant (diagonal blue lines). The stock is at the bottom of this range. This is an initial buying opportunity as we expect RWC to rally back towards the top part of this range near $5.30. A decisive break to the upside out of this consolidation (say, a weekly close above $5.50) would be the next buy signal.
Michael Gable is managing director of Fairmont Equities.
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