Plumbing supplies deliver for global investors
With a history dating back to 1912, Reliance Worldwide (ASX: RWC) has grown to become one of the world's leading plumbing specialists. It designs, manufactures and supplies premium branded plumbing supplies such as fittings, pipes, control valves and thermostatic products for plumbing and hot water systems.
The company employs over 2000 people globally in 44 locations, including 24 distribution centres, 15 manufacturing plants and five research and development centres.
The US is RWCs biggest market. Its flagship product is SharkBite, a complete brass push to connect (PTC) plumbing system for hot and cold water and central heating systems. Brass fittings account for roughly 12% of the building, repair and renovation market and is growing at above-market rates due to their ease of use, versatility and fast installation time. RWC has an estimated 80% market share in brass fittings.
The UK business, developed from the acquisition of John Guest on 2019, allowed RWC to expand into plastic PTC fittings with a market-leading product.
RWCs core markets are focused on residential accommodation which is further split into the repairs, maintenance and improvement sector, new build and Fluidtech sector covering water treatment, drinks and dispense, air and pneumatics.
How well does this translate into investment returns?
Since listing on the ASX in 2016, RWC has returned 16.4% annually (with dividends reinvested) versus the ASX 200 which has returned 12%. Most of this return (approximately 80%), has come from share price appreciation with the rest from dividends. This yield equates to 2.2% but the company does not pay any franking credits as the vast majority of its profits are made offshore and are not subject to Australian tax.
Importantly, RWC has a number of products that have been developed through research and development to solve a particular issue for the plumbing industry. Regional cross-selling and penetration of their existing markets using their products is a key element of the growth strategy. Baseline growth is targeted at 5-6% which combines market growth, price rises (margin expansion) and growth above market from market share gains.
Additional acquisitions - such as the recently announced EZ-FLO - of companies in adjacent markets allow RWC to broaden their product range further and utilise existing distribution channels.
As RWC's end market is predominantly residential housing, the business is exposed to the cyclicality of the housing market. New house building and the home renovation market typically move in tandem which is a risk, but the exposure is somewhat diversified given the multiple geographies in which it operates.
More recently, this has been a major advantage for the company with housing market price rises and a huge demand in home renovations with interest rates at all-time lows.
RWC also scores reasonably well in our Environmental, Social and Governance (ESG) assessment. Its product offering and associated innovation is linked to addressing issues such as the supply of clean water, maintenance of hygiene and sanitation. Further, it scores well in social metrics such as health and safety, product responsibility and employment quality.
Sometimes, seemingly boring businesses - such as plumbing - can be quite exciting. RWC's global platform has it well placed for ongoing growth given its connectivity to the construction and renovation markets in the US, Europe and Australia.
RWC is therefore a buy. From a financial position, it's rare to find companies that have a strong financial position, solid growth metrics and trade at a fair valuation.
The company has been able to turn its acquired revenue growth into strong free cashflow generation, with revenue more than doubling over the past four years while net profit has risen by a factor of more than three times. This has meant the company has been able to increase its operating and profit margins as it has grown.
The market has responded positively to their recent EZ-FLO acquisition which has seen the share price rally back towards its all-time highs of $6. The current price is where the company traded back in mid-2018 when its revenue was half current levels and profits were less than 30% of their 2021 profit result.
This leaves some valuation headroom for the stock which currently trades at 21 times their 2022 profit expectations given its strong global position and ongoing growth potential.
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