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Reliance has pipeline of growth

Lex Hall with AAP  |  28 Aug 2019Text size  Decrease  Increase  |  
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Plumbing fittings maker Reliance Worldwide has doubled its profit and has a long pipeline of growth despite a slowdown in housing construction and higher copper prices.

That’s the take from Morningstar analyst Grant Slade, who says continued gains in the push-to-connect fittings segment will deliver substantial earnings growth.

Slade has maintained his fair value estimate of $4.20 for no-moat Reliance Worldwide (ASX: RWC), with shares trading at an 18 per cent discount to his valuation.

Reliance's delivery of EBITDA of $262 million in fiscal 2019 is in line with Slade’s forecast for $260 million.  

“This accords with our unchanged view that Reliance’s secular growth story still has a long runway ahead of it,” says Slade.

“We anticipate operating income will grow at a robust 10-year CAGR of 10 per cent as a consequence. In FY20, we forecast net income to increase by 16 per cent to $154 million, near the midpoint of guidance.”

Reliance Worldwide this week announced it had more than doubled full-year profit to a record $133 million despite the plumbing supplies manufacturer facing headwinds including higher copper prices and a slowdown in new Australian residential construction.

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Revenue for the 12 months to 30 June jumped 43.5 per cent to $1.104 billion as profit jumped from $66 million a year ago following a first full-year contribution from the 2018 acquisition of UK plastic fittings maker John Guest.

The company met its earnings guidance, which it downgraded in May following the lack of a pipe-splitting winter freeze in the southern US, and raised its fully franked final dividend by two cents to five cents.

Shares in Reliance Worldwide surged as much as 11.2 per cent against the backdrop of a slightly higher market open yesterday. At 2pm on Wednesday, Reliance was up 2.58 per cent at $3.58.

Managing director Heath Sharp said the June 2018 acquisition of John Guest for $1.22 billion had been highly accretive, with adjusted earnings per share up 23 per cent on the prior year.

Reliance Worldwide made $14.2 million of synergy savings - well ahead of its $10 million target - and expects that to exceed $30 million per annum by the end of FY20.

"The strength of the John Guest business in terms of end-user connections, distribution partner relationships and engineering capabilities was demonstrated throughout its first year of RWC ownership and reflected in its performance," Sharp said.

"The long-term growth potential of the business and the revenue synergy opportunities continue to support the strategic rationale for the acquisition."

But while underlying sales in the US grew 8.3 per cent, Reliance faced a slowdown in new residential construction in Australia, the lack of a southern US freeze, higher first-half copper costs, increased tariffs on goods imported from China into the US, and Brexit uncertainty in the UK.

"Despite these challenges we have posted a record result," Sharp said.

Reliance forecast full-year net profit of between $150 million and $165 million, which would be as much as $99 million higher than last year's flat $66 million result.

Prem Icon Full analyst report: Reliance eyes further growth in key markets during FY20; shares remain attractive

Morningstar reporting season calendar

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. Lex Hall is content editor with Morningstar Australia

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