Australia | Mar 30 2023
This story features RELIANCE WORLDWIDE CORP. LIMITED. For more info SHARE ANALYSIS: RWC
Brokers review the impact of new product launches in the Americas for Reliance Worldwide.
-Reliance Worldwide launches two products in the Americas
-Manufacturing changes also aim to simplify the supply chain
-The upside opportunity from entering the PEX-a pipe market
-Uncertain economic conditions continue to weigh
By Mark Woodruff
The launch of two new products in the Americas region brightens the two-to-three-year outlook for global plumbing goods supplier Reliance Worldwide ((RWC)), according to brokers in the FNArena database.
While the company’s shares have rallied 20% so far this year to around $3.60, they are still well short of the $6.50 level reached at the beginning of 2022.
The release of new products is consistent with management’s strategy to increase its share of the plumbing segment through its superior brands, expanding its product range and leveraging its existing distribution network, notes Ord Minnett.
Macquarie now expects a shelf price increase for the enhanced SharkBite product, referred to as SharkBite Max (push-to-connect fittings), and expects greater organic growth potential via the addition of expansion-based fittings (PEX-a pipe) to the product line-up.
These announcements also boost Reliance’s innovation credentials, suggests the broker, and both products will benefit from, and strengthen, key channel partner relationships.
In addition, the analyst anticipates extra opportunities should evolve in the new residential construction market, as management plans to use its new expansion fitting capability as a front for broader growth.
A simplified supply chain out of Australia is also expected to free-up growth capacity in the APAC region.
At the company’s investor day, management announced the closure of the Croydon manufacturing plant in Melbourne. This was a result of the introduction of new manufacturing lines at Cullman, Alabama, to enable higher plant efficiency and manufacture of the new products in the US.
A rejigging of the manufacturing process will reduce transport costs, provide working capital efficiencies and improve the company’s responsiveness to demand, according to Goldman Sachs.
While Macquarie raises its target to $4.40 from $4.20, UBS regards these announcements as necessary for the maintenance of above market growth.
UBS, along with the remaining brokers mentioned in this article, leaves its FY23 forecasts and target price ($4.60) unchanged, though expects to see improving sales and margin from the manufacturing changes in the US during FY24.
To the untrained eye photos of SharkBite Max look similar to its predecessor, but Morgan Stanley assures new improved features should enable further differentiation from generic "Fakebite" offerings.
This new product, along with PEX-a pipe, makes sound strategic sense and position the business to continue to drive growth, suggests Morgan Stanley.
Jarden forecasts SharkBite Max could add around US$13m to US adjusted earnings (EBIT) in FY25 and lift the earnings margin by around 1.2%.
While SharkBite Max will sell at a higher price, Ord Minnett suggests the product only adds a “stay-in-the-game” element and prefers to focus on upside from PEX-a pipe.
The PEX-a pipe opportunity
This PEX-a pipe market offers new product development and the potential to win additional shelf space and market share through existing partners, believes Ord Minnett
PEX-a is the fastest growing pipe and fitting system, taking share from chlorinated PVC (which can withstand higher temperatures) and copper, explains Macquarie.
This broker feels Reliance’s entry into this market will be a key attraction for the company’s Big Box retail partners.
The product category has a wide end-market exposure to new multi-family, new residential and the restoration and renovation (R&R) segments. Macquarie expects the category will increase wallet share with professional plumbers.
The PEX-a pipe space represents around 38% of the US pipe market by volume, points out Jarden.
Assuming a 15-20% return on invested capital, this broker suggests PEX-a could represent circa US$4-6m upside for earnings in the Americas from FY25 onwards.
There is also a relatively low capital cost (around US$28m, with US$26m already incurred) to enter the PEX-a pipe market, according to Morgan Stanley.
Management believes that there will be little cannibalisation with the existing PEX-b offering. As a result, any success in this market is expected to boost group earnings.
Reliance intends to initially focus on the under-served retail market with plans to service 90% of Lowes, the second-largest hardware chain in the US. The company will focus on the wholesale market at a later date.
Lower near-term levels of construction activity in Reliance’s three key geographies are likely to result in lower volumes, cautions Ord Minnett.
Moreover, uncertain economic conditions, including rising interest rates and falling house prices have the broker adopting both a cautious outlook and Hold rating.
There are six brokers that cover Reliance Worldwide in the FNArena database, with three Buy (or equivalent) ratings, along with two Hold and two Sell recommendations. The $3.86 average target price suggests just under 8% upside to the latest share price.
Outside daily coverage, the average target price of Jarden (Neutral) and Buy-rated Goldman Sachs is $3.96.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On
For more info SHARE ANALYSIS: RWC - RELIANCE WORLDWIDE CORP. LIMITED