GWA Group Limited

Company Overview: GWA Group Limited (ASX: GWA) is engaged in research, designing, import and marketing of building fixtures and fittings to residential and commercial premises. The company is also engaged in the distribution of various products via numerous distribution channels in Australia, New Zealand, the United Kingdom and China. The Company's brands mainly include Caroma, Methven, Dorf, and CLARK.

GWA Details

Growing Geographic Presence and Favourable Market Scenario to Support Future Growth: The company has continued its operational discipline and enhanced its residential construction activity in the last quarter of FY21, which allowed GWA to deliver an improved performance in the 2HFY21. In addition, it is seeking to diversify its revenue and earnings base with strong growth in New Zealand and international businesses. In the past year, the company has increased its presence in the R&R segment and improved geographic diversification, which may provide resilience through the cycle. The company’s future growth would be supported by rising housing turnover following a steep decline in FY20. In addition, the top line may also be underpinned by the significant rise in the number of loans for construction of new dwellings in 1HFY21, and the same is likely to grow at a good pace in future.

Key Updates for Investors Consideration:

• As announced on 21 October 2021, the company has successfully finished the extension of its syndicated banking facility, which consist of a single three-year multicurrency revolving facility of $180 million and now maturing in October 2024.
• In addition, the company has extended a separate one-year multicurrency revolving bilateral facility of $40 million with Commonwealth Bank of Australia to October 2022.
• On 18 November 2021, Mitsubishi UFJ Financial Group, Inc. has made a change to holdings in the company with the current voting power of 6.06% as compared to the previous voting power of 5.05%.

FY21 Financial and Operational Highlights:

• Backed by the improved residential construction activity in Australia during 2H and strong sales growth in the New Zealand and UK businesses, the company’s revenue soared by 1.8% to $405.7 million.
• Group EBIT before significant items for the year fell by 4.7% to $68.5 million against $71.8 million in FY20. Net profit after tax before significant items stood at $42.3 million against $44.9 million in FY20. The significant items included costs associated with the consolidation of New Zealand warehouses, sale of the China plant, Methven integration costs, and Enterprise Resource Planning (ERP)/Customer Relationship Management (CRM) systems’ project costs.
• The company operates a strong cash generative business, evident by the growth of 16% in operating cashflow to $103.1 million. At the end of FY21, the company had a net debt of $104.8 million, reflecting an improvement of 28% over FY20 with a continued focus on cash management.
• As a result of decent cash generation, GWA declared a fully franked final dividend of 6.5 cents per share, which took the final dividend to 12.5 cents per share.

Revenue Trend (Source: Analysis by Kalkine Group)

Segmental Revenue Growth:

• The Australian business segment was impacted in 1HFY21 due to a slowdown in the project segment and uncertainty due to COVID-19. However, 2HFY21 proved to be a turnaround period with a growth of 4.2% due to increased completions in the detached residential segment offset partially by slow Commercial new build segment.
• New Zealand recorded strong revenue growth of 32.3% in 2HFY21, and other International Businesses recorded growth of 24.4%.

Top 10 Shareholders: The top 10 shareholders together form around 36.90% of the total shareholding, while the top 4 constitute the maximum holding. Martin Currie Australia and The Vanguard Group, Inc. are holding a maximum stake in the company at 5.96% and 5.55%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company has a decent liquidity position, evident by a current ratio of 1.66x in FY21 as compared to the industry median of 1.56x. There has also been an improvement in the cash cycle to 163.7 days in FY21, from 177.3 days in the previous corresponding period. On the leverage side, debt-to-equity for the year stood at 0.72x as compared to 0.89x in FY20.

Liquidity & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Disruption in Building Activity: The company’s operational and financial performance could be impacted by major deterioration in building activity, which may impact its sales growth and margins.
• Forex Headwinds: GWA’s business could also be impacted by any adverse movement in the foreign currency as it operates in multiple geographies.
• Siff Competition: The company’s performance could be affected by the rising market share of competitors and changing sentiments of consumers.

Outlook:

Over the long-term, the company is optimistic about its growth prospects in residential detached activity aided by improved consumer sentiment, rising dwelling approvals, new housing loans, higher housing turnover and Government stimulus. For FY22, the company would be focused on generating profitable share growth via customer and consumer initiatives. In addition, the company would also maintain decent operational leverage to cash on the expected market upturn supported by ongoing operational discipline. On the product side, GWA would continue to launch new ranges of taps, showers, accessories and sanitaryware, leveraging its centres of excellence in Auckland and Sydney.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of GWA has been corrected by 5.51% and 8.86% in the past one and three months, respectively. The stock is trading at par to its 52-week low levels of $2.530, offering a decent opportunity for accumulation. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers’ average multiple, considering the decent cash generation business, favourable market scenario and rising geographical expansion, etc. For the purpose of valuation, few peers like Reliance Worldwide Corporation Ltd (ASX: RWC), Fletcher Building Ltd (ASX: FBU), Boral Ltd (ASX: BLD) and others have been considered. Considering the expected upside in valuation & current trading levels, rising number of loans for construction activities, improvement in net debt position, optimistic outlook in the long run, plans for diversifying revenue and earnings line, decent liquidity position, valuation, and current levels, we recommend a ‘Buy’ rating on the stock at the current market price of $2.530 as on 29 November 2021, 10:32 AM (GMT+10), Sydney, Eastern Australia.

GWA Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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