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Reliance withstands COVID-19 to live up to its name in Australia

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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 that 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.

reliance plumbing covid19

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% 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%, but 7.4% ahead of consensus expectations.

  • FY20 cashflow from operations of $278.3 million, up 56%.
  • Operating cash flow conversion of 128%.
  • Net debt better than consensus, reduced by $124.4 million and leverage ratio of 1.39 times.
  • Restructuring charges of $10.7 million 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.

The company did not provide guidance for FY21 but early performance appears to be strong. July revenue growth in the Americas was 22% 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 and Africa) with all furloughed staff now back at work as well, however, we note EMEA in the second half was down 23% in constant currency terms.

Nevertheless, EMEA sales have recovered to 96% of the previous corresponding period. Importantly, analysts had expected shutdowns in Europe to produce significant negative operating leverage but instead EMEA margins were 27% in the second half after 30% in the first half.

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Roger Montgomery is founder, chairman and chief investment officer of Montgomery Investment Management. Following a successful career as an analyst and public company chairman, Roger published the first edition of his stock market guide, Value.able, in 2010, becoming an Australian best seller in just 16 weeks. He holds a Bachelor of Commerce and is a senior fellow of the Financial Institute of Australasia.
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