Reliance Worldwide continues to reward investors

Roger Montgomery

Montgomery Investment Management

Reliance Worldwide (ASX:RWC), a global provider of water control systems and plumbing solutions, is a business we’re very happy to own. True to its name, the company’s latest earnings announcement was extremely positive, which led to a strong bounce in the share price.

Reliance announced a strong performance in its Americas segment, reporting a surge in demand from US retail and hardware channels and a successful roll out of a hardware shelf/bay redesign. The company also explained it had integrated its HoldRite manufacturing plant in Tennessee with its main RWC facility in Alabama with only a three month delay and the reduction of 21 positions.

In Australia, performance was in line with expectations and the company reported minimal COVID-19 impacts. That however was not the case in the UK and Europe where revenues were heavily impacted by COVID-19 related mitigation strategies.

The company also noted it has successfully integrated its John Guest acquisition with targeted synergies achieved at an annual run rate of $31.3 million. Earnings per share accretion of 23 per cent was achieved in FY19 (after one year of ownership) and the company noted the John Guest design, tooling and injection molding capabilities have proven to be world class.

Some of the announcement highlights include:

  • FY20 net profit after tax (NPAT) of A$130 million was down 18 per cent, but 7.4 per cent ahead of consensus expectations
  • FY20 cashflow from operations of $278.3 million, up 56 per cent
  • Operating cash flow conversion of 128 per cent
  • Net debt better than consensus, reduced by $124.4 million and leverage ratio of 1.39 times
  • Restructuring charges of $10.7 milliob were recognised in FY20 to enable cost reductions of $25 million annually from the end of FY21
  • The company expects FY21 capital expenditure of A$35-55 million, lower than market expectations
  • Final dividend of 2.5 cents per share declared, total for the year of 7.0 cents
  • The first half of 2021 so far shows growth across the board
  • Most analysts expected no dividend; however the company announced a final dividend of A2.5 cents per share.

One negative was the Impairment charge of A$22.7 million related to the company’s decision to cease investment in some of its non-core products. A review of its Spanish manufacturing operations is also feared to potentially result in a write-down.

We note that on slide 16 of the company’s annual report presentation, underlying market growth in 2H-20 is estimated at 2.7 per cent. If the company can also win market share, growth should be even faster, and the market therefore may be underestimating this.

The company did not provide guidance for FY21 but early performance appears to be strong. July revenue growth in the Americas was 22 per cent year-on-year. August was a bit slower but still growing. Australia and Asia Pacific sales are up slightly on the previous corresponding period. The company reported strong recoveries in EMEA (Europe, Middle East & Africa) with all furloughed staff now back at work as well, however we note EMEA in the second half was down 23 per cent in constant currency terms. Nevertheless, EMEA sales have recovered to 96 per cent of the previous corresponding period. Importantly, analysts had expected shutdowns in Europe to produce significant negative operating leverage but instead EMEA margins were 27 per cent in the second half after 30 per cent in the first half.

Chief Investment Officer
Montgomery Investment Management

Roger Montgomery founded Montgomery Investment Management, in 2010. Roger brings more than two decades of investment, financial market experience and knowledge. Roger also authored the best-selling investment book,

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