Reliance Worldwide (ASX:RWC): It couldn’t hold off 4-decade high inflation forever, but interest rate cuts are coming to the rescue!

Reliance Worldwide (ASX:RWC) is one of the companies with the most upside to interest rates. We have argued that it was a good stock to hold amidst record-high inflation. As a plumbing supplies company, it can easily pass costs on to customers because emergency plumbing works typically can’t be put off.

But macroeconomic difficulties led to clients looking to cut costs and the company couldn’t escape an impact forever. But now there’s hope on the horizon, in the form of interest rate cuts.

 

Who is Reliance Worldwide?

Reliance Worldwide is a plumbing supplies company that is the largest manufacturer of PTC (Push to connect) behind the wall plumbing fittings. It traces its origins to Brisbane in the late 1940s but today is headquartered in Atlanta, has 58 facilities (distribution hubs, manufacturing plants and innovation centres) all over the world and employs 2,800 people.

Since 2016, Reliance publicly listed and has been led by Heath Sharp, who first joined the company in 1990 and worked his way up to the hot seat. Preceding him was a 3-decade stint of ownership by the Munz family who built it up over that time before cashing out. At the time it listed, it had net sales below US$400m and an 18.5% EBITDA margin. Now it has a 22.3% EBITDA margin and sales over US$1bn.

Although Reliance isn’t one that is afraid of undertaking M&A, this company is selective in what it purchases. In 2018, RWC spent $1.2bn to acquire the John Guest businesses in the UK. John Guest provides water delivery, control and optimisation products, and the purchase gave Reliance a significant footprint in the UK. In November 2021, Reliance bought American plumbing products maker EZ-FLO for US$325m. EZ-FLO contributed US$70m in sales during the first four months of Reliance’s ownership.

 

Meet Sharkbite

Reliance Worldwide’s flagship product is the Sharkbite range of brass push-to-connect fittings (as pictured below). These devices avoid the traditional soldering of parts into place, saving plumbers time. If you look closely, you can see the logo on the fitting. Another example is the Eastman brand of appliance connection products used by plumbers to connect washing machines, dishwashers, water heaters and fridge ice-makers to household water supplies.

 

 

How it can overcome inflation

As we mentioned in the introduction, Reliance Worldwide has attempted to overcome inflation by increasing prices – it did so by 6.5% during FY23. Getting customers to accept price increases isn’t troublesome, given that plumbing work is typically urgent.

Two things are troublesome instead. Firstly, it has so many prices to monitor, including the materials it uses in product manufacturing (copper, brass, steel and resins). Some of these change pretty fast. It also has also been on the hook for higher packaging and freight costs, not to mention higher energy bills, while getting less bang for its buck than prior to the pre-pandemic. It now takes 12 weeks for goods manufactured in Australia to be shipped to the US, double what it took pre-COVID.

Secondly, it can take Reliance Worldwide several months to discuss price increases with customers. By the time they agree to them, prices may have increased even further. At its FY22 results, CEO Heath Sharp told shareholders it had moved prices on some items in the UK four times in the last 12 months.

Als,o keep in mind that even if customers can stomach price increases, other factors have potential to impact demand as well, and they have been. These include heavy stockpiling of fixtures and fittings to guard against supply chain disruption, and a shortage of professional tradespeople – leaving a large backlog of work that cannot be completed. And so in FY24, the company sought to maintain its margins via cost savings – boasting it made $23m in savings during the period.

 

Strong results were made in recent years, but FY24 was a step back

In FY22 (the 12 months to 30 June 2022), Reliance Worldwide’s sales increased 17% to US$1.2bn and EBITDA increased 3% to US$268.7m. The company’s statutory net profit declined 3% (at US$137.4m), however, due to amortised goodwill, acquisition costs and asset impairment charges. In FY23, Reliance Worldwide increased its net sales by 6% to $1.24bn. The Americas has been a strong contributor with sales growing 13% in that region, compared to a 4% decline in the Asia-Pacific and 3% growth in EMEA.  Although its NPAT came in at $155.7m (down 4%), its cash from operations more than doubled to $292.7m. It paid a dividend of 9.5 cents per share.

Turning to the company’s FY24 results now; sales grew by a wafer-thin 0.2% to $1.25bn, albeit inclusive of the current years’ acquisition of Holman Industries. Otherwise, sales would have been 2.8% down. The best-performing region was America while the worst was EMEA. Volumes were weakened due to soft construction markets. The company’s reported profit was $110.1m, down 21% in 12 months (down 21%), but $146.9m when you exclude one-off cash items and tax benefits from amortisation (only down 6%).

At the time, Reliance told investors trading conditions would depend on broader economic conditions and it will all come down to the easing of interest rates in key geographies. RWC expected 1HY25 sales to be broadly flat, excluding the impact of Holman (which will meet expectations established at the time of its acquisition). Apart from the target of improving its EBITDA margin, and that cost reduction measures will aid the cause, the company is providing no further bottom line guidance.

 

Trump a double edged sword

RWC’s 1H25 results appeared to be a step in the right direction. Net sales and EBITDA were up 15% and its profit was up 12%. It guided to sales growth of ‘mid-single digit percentage points’ overall, but flat excluding the impact of Holman and Smart Supply.

In May 2025, the company spoke out on Trump’s tariffs, something that has been worried investors. RWC has done some manufacturing in the US but 48% of its cost of goods sold are from outside the US (includin some from China).

And so RWC has sought to diversify to other countries beyond China and has promised that by FY25, they will reduce 30% from FY24 levels. By FY27, it aims to ‘reduce to zero’ the amount of tariff impacted products sourced from China for sale to the US. This will require price increases, however, and it will have a US$25-35m hit on the company’s EBITDA in FY26.

One thing that been irking some investors is that the company has adjusted its dividend policy. While it maintains a target of paying out 40-60% of its profit, only 50% of the payout will be cash, with the balance being share buy-backs. This may be favourable to some investors, but less to so others – ultimately, more favourable for the company.

Since releasing guidance in February, the company saw a deterioration in economic conditions and expects Americas FY25 sales to be at the lower end of the previous guidance range, but overall group sales would be mid single digit percentage points.

Looking to the longer-term, the company believes it has a US$25.3bn market opportunity in water-in and water-out plumbing. Of this, $19.9bn is in the US and it has only a 4% market share there. Even in Australia, it has only a 12% market share. So there’s a big opportunity.

 

Analysts confident

There are 17 analysts covering Reliance Worldwide and they have a mean price of $5.21, up 18% from the current price. For FY25, they expect $1.32bn revenue (up 10%), $282.7m EBITDA (up 7%) and a flat profit (18c EPS). In FY26, a flat profit again but $1.49bn revenue (up 13%) and $325.4m EBITDA (up 15%).

 

Reliance Worldwide is not for dividend investors, but a good one for growth investors

The key risks with Reliance Worldwide are inflation, supply chain issues and inventory management, all of which we have addressed elsewhere in this article. We think the company has proven resilient to these conditions so far since the current inflation spike first emerged, and throughout the company’s entire seven-decade history

We also acknowledge that Reliance Worldwide does not pay out the highest dividend as a percentage of earnings, nor does it have the highest yield (just 1.2% on an annualised basis). And of course, as noted above, it intends to split its returns to shareholders between dividends and share buybacks in the future.

But investors looking for a growth stock in the industrial sector that will benefit as interest rates come down will find it tough to find a better company (at least in this sector).

 

 

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