Building Materials: A comparison of RWC, GWA and REH

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
26 April 2022, 9:30 AM
Sectors Covered:
Industrials

  • In this note we compare some key metrics for Reliance Worldwide Corp (ASX:RWC), GWA Group (ASX:GWA) and Reece (ASX:REH) and how each company stacks up in terms of trading multiples, growth outlook, debt, margins and returns.
  • We also conduct a SWOT analysis to compare the qualitative aspects of the businesses.
  • Overall, we see RWC as offering the best value with its near historically low trading multiples, healthy margins and returns, and solid earnings growth outlook.
  • While we keep earnings forecasts for RWC, GWA and REH unchanged, we lower our target prices for all three companies reflecting a general derating of the Building Materials sector.
  • We maintain an Add rating on RWC and Hold on REH but downgrade our rating on GWA to Hold (from Add).

Comparing key metrics for RWC, GWA and REH

While the Building Materials sector has been weak so far this year on concerns around the impact of higher interest rates on housing demand in both Australia and the US, for longer term investors wanting exposure to the sector we see compelling value in RWC, especially relative to GWA and REH.

We note the following after reviewing some key financial metrics for each company:

  1. RWC and GWA have similar EBITDA margins (mid-20%) and ROE (15-16%) with both higher than REH;
  2. GWA offers the most attractive dividend yield (6.6%) but has the lowest growth outlook;
  3. Forecast 2-year EPS CAGR for RWC and REH is more than double that of GWA;
  4. Despite the growth outlook, RWC’s FY23F PE of 12.6x is only a slight premium to GWA (12.1x), while REH is more expensive on 27.2x.

Key observations from our SWOT analysis include:

  1. RWC, GWA and REH all hold the number one position in their respective sectors. RWC however looks to be the most dominant with ~80% market share in the brass PTC fittings market in the US;
  2. The CEOs of RWC and REH have been at their respective companies for over 25 years, while GWA’s CEO has only been there for a little over a year;
  3. A higher AUD/USD is positive for GWA but negative for RWC and REH;
  4. The large US market presents a long-term growth opportunity for both RWC and REH while GWA is mainly an Australian-focused business with earnings tied to the building completions cycle.

RWC looks the most compelling value

Overall, we see RWC as offering the best value with its near historically low trading multiples, healthy margins and returns, and solid earnings growth outlook.

We maintain an Add rating on RWC and Hold on REH but downgrade our rating on GWA to Hold (from Add).

While GWA’s trading metrics are undemanding (12.1x FY23F PE and 6.6% yield), we believe it reflects where we are in the Australian building cycle and the modest long-term earnings growth outlook.

There is also currently less clarity on GWA’s growth strategy with the new management team to update the market at an investor day in June. We think the stock is likely to trade sideways until then.

We decrease our target price on RWC to (login to view), GWA to (login to view) and REH to (login to view). While we keep earnings forecasts for all three companies unchanged, the update to our target prices mainly reflects lower valuation multiples following a derating of the broader

Building Materials sector despite a roll-forward of our models to FY23 forecasts.

Risks

Supply chain constraints, higher costs and weaker housing conditions are key risks for all three companies.

Key catalysts

  • RWC 3Q22 trading update due on 29 April.
  • GWA investor day in June (exact date TBC)

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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