Reliance Worldwide: Slimming down
About the author:
- Author name:
- By Alex Lu
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- Date posted:
- 21 February 2023, 6:30 AM
- Sectors Covered:
- Reliance Worldwide’s (ASX:RWC) 1H23 result was slightly above expectations.
- Key positives: EMEA EBITDA was well above (+15%) our forecast; Operating cash flow jumped 57% due to lower growth in working capital; RWC expects margins to improve in 2H23 as cost pressures ease; Additional US$15m cost out by FY24.
- Key negatives: Margins were lower in all regions with group EBITDA margin down 280bp to 21.3%; Americas and APAC earnings were below expectations; Demand outlook remains uncertain.
- We increase FY23-FY25F underlying EBITDA by between 5-6% after factoring in additional cost out benefits and updates to FX forecasts.
- Following updates to earnings forecasts and a roll forward of our model to FY24 forecasts, our target price rises to (login to view). Hold retained.
1H23 result was slightly better than expected
Underlying EBITDA increased 2% to US$128.1m (+1% vs MorgansF and +2% vs Visible Alpha consensus) but underlying NPAT fell 10% to US$67.5m (+3% vs MorgansF and +2% vs Visible Alpha consensus).
Cost savings of US$6.2m were achieved in the half with ~US$8m to be realised in FY23. RWC continues to expect US$10m in annualised cost synergies related to EZ-Flo by the end of FY24.
In addition, RWC has announced a further US$15m in savings (headcount reduction, operational efficiencies, procurement gains, supply chain improvements) with US$2.5m expected in 2H23 and the full benefits in FY24.
Americas EBITDA jumped 26% (-4% vs MorgansF) driven by a full 6-month contribution from EZ-Flo. Sales ex-EZ-Flo rose 6% with price rises and new products more than offsetting a 2% decline in volumes.
We think the volume performance was solid given the deterioration in the US housing market over the past 12 months, highlighting RWC’s exposure to the less cyclical repairs & maintenance and smaller renovations markets. EBITDA margin fell 30bp to 16.8%.
EMEA constant FX EBITDA was flat (+15% vs MorgansF) on the back of 3% sales growth. UK sales were up 10% due mainly to price rises with Continental Europe steady as lower FluidTech volumes were offset by price rises. EBITDA margin fell 100bp to 31.9% due to lower volumes and higher input and energy costs.
APAC constant FX EBITDA fell 12%, which was 4% below our forecast. Sales increased 1% driven by price rises and continued strong volume growth in Australia on the back of new housing construction and R&R activity, offset by weakness in Korea and China, and lower inter-company volumes.
The decline in inter-company volumes, weaker sales to China, and higher raw materials costs pushed EBITDA margin down 290bp to 18.5%.
Management said trading in January was broadly consistent with the trends observed in 1H23, however the demand outlook remains uncertain.
In Americas, RWC expects volumes in 2H23 to be lower due to rising interest rates, declining consumer confidence, and a weaker economic outlook.
In EMEA, RWC said deteriorating economic conditions in the UK suggest a subdued outlook for residential remodelling activity, while Continental Europe volumes are expected to be down on the pcp, consistent with 1H23.
In APAC, management expects declines in residential approvals and new commencements to affect construction activity, which may impact volumes in 2H23. Lower house prices and higher interest rates are risks to remodelling activity.
Changes to earnings forecasts and investment view
We increase FY23-FY25F underlying EBITDA by between 5-6% after factoring in additional cost out benefits and updates to FX forecasts.
Following updates to earnings forecasts and a roll forward of our model to FY24 forecasts, our target price rises to (login to view).
We continue to see RWC as a good business with solid long-term growth opportunities, but the short-term demand outlook remains challenging in all regions. We retain our Hold rating pending the investor day on 28 March, which will include a new product announcement.
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