Reliance Worldwide Corporation (RWC) operates in the design, manufacture and supply of high quality, reliable and premium branded water flow and control products and solutions for the plumbing industry. Its products are used in residential and commercial applications, with a principal focus on the less cyclical residential repair and renovation end-market.
RWC has a well known brand called SharkBite which is a Push to Connect fitting used in behind the wall plumbing systems. Fittings are connectors. They are used in plumbing systems to connect lengths of pipes, and to connect pipes to different types of control valves.
In May of this year RWC also acquired a UK business called John Guest for A$1.22 billion. This represents a 12.4x calendar year 2017 underlying EBITDA. This has polarised the share market to a degree as the market is concerned about the degree of cost savings and synergies that can be generated considering RWC has paid a higher valuation to acquire John Guest.
We believe that this recent deal does make strategic sense given it combines RWC’s strong presence in the United States with John Guest’s strong market position and distribution capabilities in the UK and Europe. The deal has created a strong global push to connect fittings player in both brass and plastic with locations in all key regions. While the deal is highly earnings accretive, the key negative has been the fall in return on equity which drops from 35 per cent pre acquisition to 15pc in 2020.
At their annual general meeting RWC provided a trading update which was in line with our expectations with financial year 2019 guidance for earnings (EBITDA) of A$280-290 million maintained.
Key points from the update:
- The Holdrite acquisition completed in June 2017 is now fully integrated and meeting internal expectations.
- The integration of John Guest is progressing well and financial results since completion in June 2018 have met management expectations. Synergies are on track to meet the annual target of A$30m by the end of financial year 2020 (with A$10m realised in financial year 2019).
- Financial Year 2019 earnings (EBITDA) guidance of A$280-290m has been reiterated driven by continued low double-digit sales growth in the United States, high single-digit sales growth in John Guest and A$10m of realised acquisition synergies.
At current prices at time of writing, RWC is sitting at $4.56/share as we are anticipating earnings next year to come in at $0.21/share this places RWC on a PE of 21x earnings, and dividend yield of 3.4pc p.a. Given RWC’s performance remains in line with our expectations we make no changes to earnings forecasts and maintain our add rating. We continue to view RWC as a high quality company with strong market positions, an experienced management team and a strong earnings growth profile. We therefore continue to see the recent share price pullback as a good buying opportunity.
- Boh Burima Financial Adviser | Authorised Representative: 000341081 Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410