GWA Group: Cycle still has a way to go

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
16 February 2022, 11:30 AM
Sectors Covered:
Industrials

  • GWA Group’s (ASX:GWA) 1H22 result was slightly above expectations.
  • Key positives: EBIT margin grew 140bp to 17.7%; ROFE rose 240bp to 17.5%; Balance sheet remains healthy with ND/EBITDA improving to 1.3x (1H21: 1.7x).
  • Key negatives: Operating cash flow fell 12% due to negative working capital movements; NZ sales -15% and International -5% due to shutdowns and restrictions.
  • FY22F/FY23F/FY24F underlying EBIT changes by 0%/0%/-5%.
  • Our target price declines to (login to view) and we maintain our Add rating. While expected interest rate rises will have a dampening effect on housing demand, we believe this is some time away with conditions to remain favourable in the short term underpinned by solid R&R and detached housing activity.

1H22 result was slightly better than expected

1H22 underlying EBIT was up 11% to A$35.6m (+3% vs MorgansF and Visible Alpha consensus) while underlying NPAT rose 12% to A$22.4m (+3% vs MorgansF and Visible Alpha consensus).

Group revenue increased 2% reflecting improved Australian sales (+6%) partly offset by lower NZ sales (-15%) due to the five-week shutdown and weaker international sales (-5%) on the back of a strong pcp and COVID disruptions in the UK and Asia.

EBIT margin grew 140bp to 17.7% despite higher freight costs. The improvement reflected supply chain cost savings from the consolidation of the NZ distribution network ($2m) and lower marketing costs. GWA expects to realise an additional $1m in supply chain cost savings in 2H22.

Market conditions and outlook

GWA expects continued momentum in all its key markets, particularly residential and commercial R&R.

Labour availability and global supply chain disruptions have extended the timing of completions (particularly new detached projects) from around 9-12 months to 12- 15 months. Consequently, GWA expects completions activity to remain strong into FY23.

Commercial new build is expected to remain subdued while multi-res is expected to be flat in FY22 due to lower net migration resulting from the international border closures and travel restrictions.

Management is targeting 2H22 underlying EBIT to be higher than 1H22 ($35.6m), subject to any potential further impact of the general economic environment. We forecast 2H22 underlying EBIT of $38.7m.

Changes to earnings forecasts

Despite the slightly better-than-expected 1H22 result, we keep our FY22 earnings forecasts largely unchanged, preferring to take a conservative approach due to the uncertainty around labour availability and supply chain disruptions.

Our FY23 earnings forecasts also remain broadly unchanged while our FY24 estimates decrease by 5% after factoring in a potential peaking in housing activity on the back of a higher interest rate environment.

Investment view

GWA has good leverage to an improving housing market with conditions expected to remain favourable for the remainder of FY22 and into FY23.

Trading on 14.4x FY22F PE and 5.5% dividend yield with a healthy balance sheet, we continue to see the balance of risks being to the upside and maintain our Add rating.

Our equally-blended (PE, EV/EBITDA, DCF) target price falls to (login to view).

Risks

Key downside risks include a slower-than-expected recovery in the housing market, COVID-related disruption, higher costs, a lower AUD/USD and weaker consumer confidence.

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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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