Result overview:
Group revenue -1.6% in FY23, -5.8% in 2H23
FY23 EBIT $70m, consensus $70m
Normalised net profit $44m -6.6% on pcp
Final dividend 7cps (full year DPS 13cps), dividend yield 6.7%
FY23 result. GWA’s end market exposures are enduring a tough time and this is set to extend into FY24. The company increased prices in July 2022 (~5%) and March/April (~4-5%) but 2H23 revenue fell ~6% suggesting the volume decrease was more like ~10%. This price/volume dichotomy is a trend we are seeing in other parts of the construction industry. The cause is due to weak demand as customers (plumbers) continue to destock.
The April price increases have been absorbed by customers, providing a margin benefit to FY24 earnings, but GWA’s dilemma is whether further price increases are possible in such a weak period of demand.
On the cost side of the earnings equation, freight costs are easing but weak demand is pushing customers to more value conscious product. Management believes it can maintain margins in FY24 though this will be a delicate effort.
Cash conversion improved substantially to 112% from the dismal FY22 outcome of 52%. The industry trend of normalising working capital was the key factor and we think this will stabilise around 25-26% of sales in FY24. The benefit of higher cash conversion was a reduction in leverage to 1.5x with net debt at $117m.
Outlook. GWA management is anticipating better activity in commercial, residential (detached housing) and multi-residential housing, but for repair and renovation activity to remain subdued.
Investment View
The frosty conditions of FY22/23 are thawing into FY24, but the market remains aloof from GWA’s cheap valuation metrics. At 11.5x FY24 PER, the share price has only modestly perked up, unlike the fervour with which investors have flocked to James Hardie (JHX, buy rated) and CSR (CSR, Hold rated) to a smaller extent.
GWA has a good financial footing, and the dividend yield offers plenty of attraction. All that is missing is a flicker of earnings momentum coming back into the plumbing and tapware segment of the construction market.
Risks to Investment View
GWA’s market is competitive, and earnings growth may be at risk if it cannot balance its relationships with key customers and its own direct business with developers. Private label brands could also eat into market share. Freight and other costs could remain elevated if supply chain issues do not improve.
Recommendation
We have retained our Buy recommendation.
