Should you buy, hold or sell GWA Group shares?
You may not be familiar with the company GWA Group (ASX:GWA), but you probably make use of its products.
It makes toilets, sinks, showers, tubs and other water products for the bathroom, kitchen and laundry. It is behind such brands as Caroma, Methven, Clark and Dorf.
It designs products and sells them to both residential and commercial customers. The products are manufactured by suppliers in Asia and Europe.
Relying on the renovation industry
Residential sales are largely driven by new builds and renovations and likewise for commercial.
It generates approximately 60% of its sales revenue from the renovations and replacement segment in Australia.
Sales are also impacted by the decisions of merchants to increase or decrease their stock of GWA products. About 60% of its revenue comes from its four largest customers, with the single largest customer accounting for 24% of revenue.
Revenue is predominantly derived from Australia at 82%. 10% comes from New Zealand and a further 8% from the UK. Within Australia, NSW is the largest market at 35%, followed by Victoria at 25% and Queensland at 20%.
Rising inflation put renovations on hold
In the 2023 financial year revenue declined by 1.6% impacted by the general economic slowdown with rising interest rates and inflation causing people to think twice when it comes to renovations and look for value options where possible.
All three markets registered declines, with the largest declines coming from New Zealand due to the recession there. Some of the declines in volumes sold were able to be offset by increased prices charged.
You need to dig into the accounting a bit to understand what happened with profits.
Making sense of the profits
Reading the presentations from management, they state that FY23 normalised profits declined about 6%. However, statutory profit increased 23%.
The reason was a $15 million pre-tax significant item in 2022. $10 million related to a project to upgrade ERP/CRM software and $5 million to the closure of the China sales operations.
Importantly, the 2023 accounts had minimal significant items and therefore the healthy operating margin of 17% is a true reflection of the business performance. Return on equity is also consistently in the low to mid teens.
It has a healthy balance sheet with a net gearing ratio of 55%. In 2023 its reduced its debt using its improved cash flow. They were also able to reduce the levels of accounts receivable and inventory, reversing the inventory build-up of the prior year. Over the long term, cash generation has been strong.
For investors who place a high value on deriving income from their investments, GWA is worthy of consideration.
It is currently trading on a forecast dividend yield of 6.2% and the dividends are fully franked. They reduced the dividend from 15c in 2022 to 13c in 2023. Analysts are forecasting 13.1c in 2024.
They tend to pay out 75% - 85% of earnings as dividends. Importantly, the dividends are backed up by solid cash flow and earnings, which provides a higher level of confidence that the dividends will be able to be maintained.
In addition to the dividend yield, the share price is trading at a forecast PE ratio of 12.7 and other valuation metrics are also trading at relatively cheap levels. Just prior to the start of the pandemic, shares were trading at $4 and the reported earnings per share (EPS) has changed little since then.
Since the announcement of the latest full year results in mid-August, the share price has been very volatile, first spiking higher to $2.22 then sliding to $1.63 two months later, before rebounding to the current level above $2.20.
The outlook outlined at the results presentation in August was mixed, but with some positive signs. The residential renovations market was expected to remain subdued, with BIS Oxford Economics predicting the market would slide by 8% over the year.
On the positive side, demand is expected to increase for new builds and repair and renovations for commercial health and aged care facilities. There is a solid pipeline of residential-detached housing and increased activity in multi-residential, social and affordable housing and build-to-rent categories.
Both state and federal governments have made it very clear that they wish to increase the stock of affordable housing.
There is significant undersupply in the rental market, which is putting upward pressure on rents.
Market forces should see this lead to more investment in housing, especially high-density residential, which could lead to another construction boom and demand for GWA's products.
GWA have also adjusted its product mix to include cheaper tapware and shower products which should have more appeal to the affordable housing market.
Following the update at the Annual General Meeting in October, market analysts began to upgrade their earnings forecasts. But those forecasts have slipped slightly in the last few weeks. The Half Year results are due to be released on February 19 and will provide a good indication of how the business is tracking.
GWA has a Stockopedia StockRank of 98, placing it in the top 2% of stocks on the ASX and earning it a place in our top 20 stocks portfolio for 2024. It has been a steady performer over time, riding the cycles and adjusting the business as required.
It is not likely to be a high-growth company, but if purchased at the right price, steady growth in earnings and dividends could lead to a profitable investment.
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