Reliance Worldwide Corporation Limited

Company Overview: Reliance Worldwide Corporation Limited (ASX: RWC) is engaged in the design, manufacture and supply of water flow and control products and solutions for the plumbing industry. It is one of the leading manufacturers of water delivery, control, and optimization systems for the modern built environment in Australia. The company creates and innovates plumbing products for commercial, residential, and industrial applications and has distinctive end-to-end meter to fixture and floor to ceiling plumbing solutions, which target the repair, renovation, service, new construction, and remodel markets. RWC manufactures and distributes products that disrupt and transform traditional plumbing methods with an aim to make the end user’s job quicker and easier and is one the leading manufacturers in the world of brass Push-to-Connect plumbing fittings.

RWC Details

Improvement in Operational Performance and Core Group Capabilities: Reliance Worldwide Corporation Limited (ASX: RWC) is engaged in the designing, manufacturing and supply of water flow and control products and solutions for the plumbing industry. As on 24 August 2020, the market capitalization of the company stood at ~$2.27 billion. The company intends to invest in various capabilities ranging from development and commercialization of the new products, improvement in operational performance and core group capabilities. It is optimistic about the future of the core businesses and is expecting growth opportunities from new products. RWC is achieving ongoing above-market growth rates for its core Speedfit business in the UK and SharkBite PTC fittings in North America.

The company has recently released its results for FY20, which reflects resilience in the core markets in the US and Australia. During the year, the company reported a growth of 5% in net sales to $1,162 million. This was mainly due to strong performance in America, Asia Pacific, and the UK and European sales. During the year, the company reported NPAT of $89.4 million and saw a decent cash generation with an increase of 56% in cash flow from operating activities to $278.3 million. In the same time span, the company reduced its net debt by $124 million and leverage down to 1.39 times Net Debt to EBITDA from 1.67 times in the pcp. The decent financial and operational performance enabled the Board to declare a final dividend of 2.5 cps, bringing the total dividend to 7 cents per share.

The company has reduced its working capital by 14% and reduced its cash conversion cycle by 35 days from the prior year. During the year, the company undertook cost reduction initiatives to pursue future profitable growth. These initiatives, along with procurement savings and other measures, are expected to deliver annual cost savings of $25 million by the end of FY21.

The COVID-19 situation has evolved continuously and thus is expected to have a minimal impact in the short term. The company is working with its supply base to prioritize production to restock products that have lower inventory levels. RWC continue to have a diverse business across end-users, channels, geographic reach, product, raw materials, and technology and is focusing on its approach to new products and solutions, which are needed to target end-users. The company will continue to pursue opportunities to drive efficiency improvements and will optimize its manufacturing footprint.

FY20 Financial and Operational Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Reliance Worldwide Corporation Limited. AustralianSuper is the largest shareholder in the company, with a percentage holding of 10.90%.  

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Increased Profitability and Financially Stable Balance Sheet: During 1H20, gross margin of the company witnessed an improvement over the previous half and stood at 42.9% from 41.5% in 2H19. In the same time span, EBITDA margin of the company stood at 23.5% as compared to the previous half margin of 21.8%, indicating increased profitability. The improvement in the gross and EBITDA margin indicates that the company is managing its costs well and is capable of converting its revenue into profits. During 1H20, assets/equity ratio of the company stood at 1.49x, down from 2.62x in 1H18 and debt/equity ratio witnessed a decline from 1.17x to 0.28x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet. In the same time span, Return on Equity of the company was 3.5%, and current ratio stood at 2.91x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Decent Increase in Sales and Stable Balance Sheet: During 1H20, the company reported an increase of 5% in net sales to $569.3 million. The growth rate was highly influenced by currency translation effects. During the half-year, RWC reported EBITDA of $126.3 million and NPAT of $50.1 million. In the same time span, the company realized synergies of $12.3 million from the acquisition of John Guest. It procured various initiatives and made continued improvement in several aspects, delivering cost reduction benefits of $1.5 million and generated strong cash of $112.8 million from operating activities, reflecting an increase of 163% on pcp. During the half-year, the company reduced its net debt by $31.9 million to $394.7 million, resulting in a decent balance sheet. It also reduced leverage with Net Debt/EBITDA ratio down to 1.57x from 1.67x earlier. The company continued to invest in new product development and commercialization and is confident in the potential for the long-term success of these new products.

1H20 Financial Highlights (Source: Company Reports)

Segment Performance for FY20: COVID-19 led to a severe economic contraction in EMEA, and the Australian region saw a decline in new residential construction which is likely to negatively impact volumes. The company is targeting new product revenue growth to partly mitigate any downturn in sales because of broader macro demand drivers. RWC remains cautious with the second wave of the downturn in new residential construction as a result of Covid-19. The company is working on restoring its depleted inventory distribution channels in the EMEA region.

Key Risks: The company is exposed to a variety of risks that may impact the company’s ability to achieve its business objectives and its financial results and position. These risks include changes in general economic conditions, legislation and regulation which may impact activity in RWC’s end-markets, loss of customers, foreign currency risk, events affecting manufacturing or delivery capability, materials supply and price risk, the impact of product recalls, product liability claims or claims against RWC where a product has not been correctly installed by a third party.

Future Expectations and Outlook: The company is prioritizing investments in the future growth of the business while meeting the operational challenges and market uncertainties of the current environment. It is focused on operational excellence and execution, remaining agile and acting quickly in the face of changing external factors. RWC is targeting to deliver above-market top-line growth in all key geographies and margin expansion through continuous improvement initiatives. It is working on improving its supply chains, including sourcing security and overall planning and efficiency improvements. The company seems to be well-positioned and appropriately structured to navigate the near-term challenges and to accelerate as the dust settles. RWC is expecting smart acquisitions to drive non-organic growth and is planning to expand its availability by creating value for its distribution partners.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is taking greater ownership of driving user demand and grow into adjacent plumbing, heating, water quality and fluid technology. The company has entered selected European, South American and Asian Geographies. As per ASX, the stock of RWC gave a return of 6.69% in the past three months but a negative return of 1.71% in the last one month (as of 21 August 2020). The stock is also trading above its 52-weeks’ average levels. We have valued the stock using the EV/Sales multiple based illustrative relative valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, improvement in financial performance despite the softer market conditions and positive long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $3.38, up by 17.77% on 24 August 2020, owing to its release of FY20 results.

RWC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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