Reece shares (ASX:REH): A year ago, we thought it was a great company, but significantly overvalued – is it cheaper now?

Reece shares (ASX:REH) represent ownership in one of two plumbing companies in the ASX 200 – the other being Reliance Worldwide (ASX:RWC). Both companies have benefited from the home renovation boom during the pandemic and the ability of companies to pass increased costs on to their companies.

A year ago, we wrote on Reece stating it was overvalued at 40x P/E. In light of a crash post its 1H25 results, it is now 30x P/E. Is now the time to buy in?

Who is Reece?

Reece supplies plumbing, as well as bathroom, waterworks and HVAC-R (Heating, Ventilation, Air Conditioning and Refrigeration) products in Australia, as well as New Zealand and the United States. It serves professional trade, wholesale and retail markets. The company is named after its founder H.J. Reece who started the company in Caulfield, Victoria in 1920. More than a century on, his company employs over 9,000 people across the world. It services plumbing, bathroom, building, civil, pools and irrigation, heating, ventilation, air conditioning, fire protection and refrigeration industries. Since 1969, it has been majority-owned and run by the Wilson family.

Source: Company

The US is leading its growth

It has been the number 1 player in Australia for some time, yet only entered New Zealand in 2006 and the USA in 2018. It entered America through purchasing 171-showroom residential plumbing company MORSCO for $1.9bn, only to retire that brand less than 4 years later and launch Reece USA.

In FY18, the last year before it entered the USA, Reece recorded $2.7bn in revenue and a $225m profit. By FY24, it had recorded $9.1bn in revenue and a $419m profit. More than half of its revenue came from the US and sales growth was twice as fast (21%). It paid a 25.75c per share dividend.

Reece shares rose, then crashed back to earth

Reece shares more than doubled between June 2022 and September 2024, but are down 40% since then. The company foreshadowed that the years ahead would be difficult. It warned in its FY24 release that,’ We expect the near term to remain challenging in both regions’.

The company’s revenue retreated 3%, its EBITDA by 10%, its EBIT by 17% and its profit by 19%. Accordingly, the company cut its interim dividend by 19%.

Reece admitted trading conditions were challenging and capex was high. What would also have worried investors is that Chairman Alan Wilson was standing down from the board after serving since 1969 and becoming ‘Chairman Emeritus’.

Will things get better?

Analysts covering Reece have a target price of A$18.91, a 7% premium to its $17.71 price right now. Analysts expect a retreat back to $8.9bn in revenue and a $355m profit. A slight recovery in FY26 is anticipated, to $9.3bn revenue and a $400.5m profit, followed by $9.8bn revenue and a $452.2m profit in FY27. FY28 is expected to be a strong year with $11bn revenue and a $542m profit.

Reece is trading at P/E multiples of over 31.3x for FY25 and 27.9x for FY26. Its EV/EBITDA multiples are 13.6x and 12.7x. We think investors would be better off in Reliance Worldwide (ASX:RWC) or in Beacon Lighting (ASX:BLX) because they are undervalued.

Consider that Beacon is 25.7x P/E and Reliance is 15.9x for FY25. Reliance also runs the benefit of not running brick and mortar stores, and thus would have a lower employee expense.

Look to other companies

In investing, what you don’t buy is just as important as what you do. Companies can be good companies, but still burn investors because investors bought at too high a price. In our view, even though Reece is a good company, we cannot justify paying 30x+ P/E for a company that is expected to be flat for the next 18 months or so.

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