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Divided Opinions on Reliance Worldwide

Australia | Dec 21 2022

This story features RELIANCE WORLDWIDE CORP. LIMITED, and other companies. For more info SHARE ANALYSIS: RWC

Broker opinions are divided on Reliance Worldwide with company revenues largely beholden to restoration & renovation activity.

-Brokers are divided on the outlook for Reliance Worldwide
-Goldman Sachs believes shares are oversold
-While Jarden expects lower revenue growth 
-Shares are trading down over -55% year-to-date

By Mark Woodruff

Goldman Sachs believes shares in global plumbing goods supplier Reliance Worldwide ((RWC)) are oversold, having underperformed the US homebuilder Index, UK peers and channel partners.

Shares are trading down over -55% year-to-date and closed yesterday at $2.83.

At the same time, the Buy-rated broker lowers its near-term volume outlook and reduces its 12-month target price to $4.05 from $4.25.

Between FY17 and FY22 the share price more than doubled as the company experienced revenue growth of 20% per year (US$ terms), driven by acquisitions, market share gain in the plumbers' truck and shelf space at major US retail channel partners such as Home Depot and Lowes.

Goldman Sachs points out restoration & renovation (R&R) activity is the single largest driver of revenue for Reliance, which is largely driven by movements in home prices.

The analysts expect R&R spend in the US to increase 18% in 2022 before declining by -3% in 2023. However, these figures are flattered by inflation, with volumes expected to decline by -2% in 2022 and -6% in 2023.

New housing starts for 2022 and 2023 in the US are also forecast by Goldman Sachs to decline by -4% and -21%, respectively.

The broker's focus is upon the US, as around 60% of the company’s revenue and circa 50% of earnings (EBITDA) are generated in the Americas. The company also operates in A&NZ, Korea, China, Canada, the UK, Spain, Italy, Germany, France, the Czech Republic and Poland.

Goldman Sachs also expects retail channel volumes will decline for Reliance by around -5% in FY23 and notes little evidence of inventory destocking so far.

In late November, Jarden also began covering Reliance, but on a less optimistic note than Goldman Sachs, with a Neutral rating and $3.40 target price.

This broker noted potential downside risks to the company’s earnings, especially in FY24, due to falling new starts, rising cancellations of US new-build contracts and falling US existing home sales, which lead remodeling demand by four to five quarters.

Both Goldman Sachs and Jarden sit outside the FNArena database, which has an average target price (seven brokers) of $3.84, suggesting 29.2% upside to the latest share price. Four brokers in the database have a Buy (or equivalent) rating, while there are two Holds and a Sell.

Jarden noted swing factors in demand for the company derive from new starts and remodelling activity and the broker pointed to a growing decline in existing home sales in the US, UK and Australia, leading to a decline in R&R activity.

Instead of the historical 20% per annum revenue growth noted above, the broker forecasts flat growth between FY23 and FY25, due to the housing down cycle and challenges to gain more market share and shelf space for the company's mature products.

Jarden has a preference for Overweight-rated Boral ((BLD)) and CSR ((CSR)) in the Building Materials sector. The former is considered a turnaround story and the latter offers an attractive dividend yield, along with appealing break-up value.

Other broker opinions

The most bearish research on Reliance Worldwide in the FNArena database comes from Citi, with a Sell rating and a $3.00 target, set back in late-October.

This broker commenced research in April 2022 at a time when the company’s share price had already declined by -30% since the beginning of 2022 and de-rated from a historical 10% premium to a -20% discount to the ASX200.

An original target of $4.00 was set and has been ratcheting lower since.

Following the company’s third quarter results for FY22, the broker lowered its earnings forecasts to reflect lower margin guidance and softer margins for US plumbing parts manufacturer EZ-Flo. The target was reduced to $3.84 from $4.00.

FY22 results in August led to only a slight further fall in target to $3.80 as strength in the EMEA region was offset by weakness in APAC, while US results were in line with the broker’s expectations.

The latest $3.00 target was reached in October, when Citi was disappointed by a September quarter update showing strong competition and rising input costs, resulting in margin compression.

More positively, the broker noted an appreciating US dollar had cushioned the blow and EZ-Flo margins remained strong.

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