Reliance Worldwide: Outlook getting tougher

About the author:

Author name:

By Alex Lu

Job title:

Analyst

Date posted:

23 August 2022, 8:00 AM

Sectors Covered:

Industrials

• While Reliance Worldwide’s (ASX:RWC) FY22 result was above expectations, management pointed to several potential headwinds ahead with little visibility on the outlook.
• Key positive(s): Americas and EMEA EBITDA were better than expected; Americas underlying volume growth was positive despite cycling record volumes in FY21; 4Q22 group underlying EBITDA margin (ex-EZ-FLO) of 25.0% was in line with management’s target of mid-20%.
• Key negative(s): Americas (-160bp ex-EZ-FLO) and APAC (-390bp) EBITDA margins were materially lower; Operating cash flow was down 44% mainly due to higher inventory levels.
• We decrease FY23-25F underlying EBITDA by 4-7% while underlying NPAT reduces by 8-11%.
• Our target price drops to (login to view) and we downgrade our rating to Hold (from Add). While we continue to see RWC as a good business with solid long-term growth opportunities, the outlook is highly uncertain with signs that activity is softening in all regions.

Solid FY22 result

RWC’s FY22 result was better than expected with underlying EBITDA up 3% to $269m (+5% vs MorgansF and +2% vs Bloomberg consensus) and underlying NPAT rising 2% to $161m (+10% vs MorgansF and +7% vs Bloomberg consensus).

Americas EBITDA rose 10% (+7% vs MorgansF) reflecting a 7.5-month contribution from EZ-FLO and further strength in the residential repair & remodelling (R&R) market. A key highlight was ongoing underlying volume growth on top of the record volumes achieved in FY21. Excluding EZ-FLO, EBITDA was down 3% as price rises to offset input cost inflation were dilutive to overall margins.

APAC EBITDA fell 14% (-8% vs MorgansF) despite sales rising 3% (or +6% on a constant FX basis). The growth in sales was mainly driven by increased remodelling and residential construction activity, however margins were adversely affected (-390bp) by lower intercompany volumes due to the cycling of the US freeze event in FY21 along with a negative profit in stock movement. 

EMEA EBITDA increased 2% (+7% vs MorgansF) on the back of flat sales. Continental Europe sales jumped 17% driven largely by growth in water filtration and drinks dispense products, while UK plumbing and heating volumes were down as the business cycled heightened COVID-related activity in FY21.

EMEA was the only region to deliver higher EBITDA margin (+90bp) as price rises and cost savings initiatives more than offset input cost pressures.

Outlook commentary suggests headwinds ahead

RWC advised that group sales in July were down 3% (or +19% incl. EZ-FLO).

Management said recent trading in the US has been mixed with commercial, multi-res, and mixed-use construction strong while detached housing construction is slowing.

Demand for water heaters has also softened. In addition, RWC is seeing wholesalers reduce inventory levels on the back of improving supply chains and a more subdued outlook.

In Australia, RWC expects a backlog of work to support volumes for the first part of FY23, while in the UK, deteriorating economic conditions, rising costs and declining consumer sentiment are risks for residential remodelling activity.

Changes to earnings forecasts and investment view

We decrease FY23-25F underlying EBITDA by 4-7% while underlying NPAT reduces by 8-11% on higher D&A and net interest expense.

While we continue to see RWC as a good business with solid long-term growth potential, today’s commentary suggests the outlook for demand is softening in all regions with downside risks from higher interest rates, lower consumer confidence, declining house prices, inflation pressures and continued supply chain disruptions.

With low forward visibility increasing the uncertainty of our earnings forecasts, we move to a more cautious stance.

Our PE-based target price decreases to (login to view) and we downgrade our rating to Hold (from Add).

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