GWA Group’s annual meeting reported a hot and cold mix of news as the Australian economy re-opens but New Zealand remains in the grip of restrictions.
The Australian business has endured a tough couple of years due to cyclical driven demand deterioration and destocking from key customers. But the signs are good that a return to growth is happening and has persisted into 1H22f with revenue increasing 6% in 1Q22.
This was a good outcome considering the quarter remained affected by lockdowns that were disruptive for companies that sell into large construction sites and/or have a product portfolio that caters to non-urgent work. GWA’s portfolio of front-of-wall bathroom products is typically skewed to the tail end of the construction cycle.
GWA effected a 4% price increase on 1 July 2021 and will introduce another 4% price rise on 1 December 2021. Importantly, volumes appear to be gradually improving and there are signs the growing commercial order book is being converted into actual sales. The ability of GWA to realise such price increases points to its collaborative relationships with its key customers.
This has been a long time coming but is finally delivering on the promise of the commercial market which accounts for about one third of GWA’s end market exposure.
The New Zealand business is mired in on-going lockdowns, particularly in Auckland. Sales were down 32% in the quarter compared to last year, due to the Level 4 restrictions. We point out that GWA’s DC is located in Auckland. These restrictions are beginning to unwind and September saw a strong rebound in sales.
Despite most shareholders voting to retain the current chairman, the Board has signalled its intention to refresh the Board. The current chairman has been in the role for 8 years with another 4 years as a non-executive director. Of the other 6 directors (other than the Chair and CEO), half have been on the Board for over a decade. An injection of fresh ideas and thinking could certainly help propel GWA forward.
Investment view
The signs of business activity returning to normal as lockdowns and restrictions are lifted forms the basis for our positive outlook for GWA. Volumes are improving and price rises are sticking allowing GWA to offset an expected $6 million increase in freight costs this year.
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.
The Australian business is on an upwards trajectory and New Zealand has turned the corner as well.
On a FY22f PE ratio of 15x and a 4.8% net dividend yield, we continue to recommend GWA as a Buy.
