Reliance Worldwide (ASX:RWC): Plumbing supplies as a 4-decade high inflation hedge

Reliance Worldwide (ASX:RWC) is one of the best companies to hold amidst record-high inflation, in our view. As a plumbing supplies company, it can easily pass costs on to customers because emergency plumbing works typically can’t be put off.

Although the company’s share price has not been immune from decline, as the pandemic-fuelled renovation boom ended, the worst of the decline appears to be over.

 

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, it 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.

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 – having done 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). It also is 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.

Also keep in mind that even if customers can stomach price increases, other factors are impacting demand as well. 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 FY22 and FY23

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.

The company just unveiled its FY24 results. 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%).

 

The future looks bright

Reliance has 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. Fortunately, many markets will cut interest rates faster than Australia’s own RBA. RWC expects 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.

One thing that may irk some investors is that the company is adjusting 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.

There are 15 analysts covering Reliance Worldwide and they have a mean price of $5.42, up 15% from the current price. For FY25, they are more optimistic than the company, expecting $1.4bn in revenue and a $171.7m profit. In FY26, $1.5bn in revenue and a $195m profit, followed by a $1.6bn revenue and a $210.7m profit in FY27.

In our view, Reliance Worldwide is worth A$6.72 per share using a DCF model. We have gone with consensus estimates for revenue and earnings, used a WAAC of 9% (using a 3.6% risk free rate of return, a 5% equity premium and a 1.08 beta). After assuming 10% cost-inflation in FY23 and 5% in FY24, we assume inflation moderates to 3% per annum thereafter. It is important to note we did the entire model in USD and returned US$4.48 per share, a 33% premium to the $3.37 share price on February 20, 2024. The current exchange rate returns A$6.72, although forex rates can be volatile.

Judging by the company’s 20% share price growth in the last 12 months, it appears investors are optimistic about the company.

 

 

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 2.2% 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 be immune from the worst of inflation will find it tough to find a better company (at least in this sector).

 

 

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