Morningstar has retained its fair value estimate and upbeat outlook for plumbing supplier Reliance Worldwide as professional and DIY customers alike helped boost sales.

Morningstar analyst Grant Slade says shares in the company remain attractive, trading at a 20 per cent discount to his fair value estimate of $4.20.

At 2pm on Tuesday, Relia­nce Worldwide (ASX: RWC) was up about 8 per cent at $3.65.

“Reliance’s second-half Americas performance was decidedly strong, benefiting from strong retail channel demand, which defied the outbreak of the coronavirus in the US during the period,” Slade says.

“Strong second-half retail channel demand from DIY customers and professional plumbers—largely from the repair and maintenance segment of the plumbing fittings market—offset weakened demand in wholesale channels.

“As a result, second-half sales grew 11 per cent in local currency terms, offsetting disappointing first-half sales that were affected by the loss of a major plumbing wholesale customer to a private-label offering.”

Reliance Worldwide (RWC) - 1YR

Reliance Worldwide RWC - 1YR

Source: Morningstar Premium

The company reported a 5.3 per cent rise in net sales to $1,162 million.

Its pre-tax profit fell 23.1 per cent to $135.9 million; net profit fell 32.8 per cent to $89.4 million.

A final dividend of 2.5 cents per share, which is half what it paid last year, is payable on 9 October.

He forecasts strong secular growth for the company, propelled by its push-to-connect, or PTC, plumbing fittings franchise, which he expects to deliver a largely unchanged five-year operating income compound annual growth rate of about 12 per cent.

Group earnings before interest, tax, depreciation and amortisation of $251 million tracked Slade’s full-year estimate of $253 million.

Reliance’s Americas units did the heavy lifting, picking up the slack for more disappointing earnings in other markets.

“As we anticipated, Reliance Worldwide’s exposure to inelastic demand from repair and maintenance plumbing work drove a resilient fiscal 2020 result despite the coronavirus pandemic,” Slade says.

“Europe, Middle East, and Africa segment earnings were substantially affected by a government-imposed lockdown in the United Kingdom during the second half of the year.

“However, Reliance’s Americas segment offset that weakness, with a strong second-half result driven by the retail channel.”

Slade has forecast flat group EBITDA of $251 million and expects earnings growth to resume from fiscal 2022.

Some of this second-half strength in US sales is unlikely to repeat in fiscal 2021, he says.

Nonetheless, he expects a largely flat fiscal 2021 result, which he attributes to the resilience of demand for Reliance’s behind-the-wall plumbing fittings from essential repair and maintenance plumbing work.

Reliance Worldwide designs and manufactures branded, plumbing products, including its labour-saving SharkBite-branded brass PTC plumbing fittings, which has about a 90 per cent share of the brass PTC fittings category.

Reliance operates in North American, European and Australasian plumbing product markets, with 70 per cent of sales derived from the US in fiscal 2018.

Its acquisition of leading UK plastic PTC fitting and pipe manufacturer John Guest in 2018 boosted its European market exposure.


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