GWA is chasing a greater mindshare of the products plumbers use for additions and alterations around Australia and New Zealand.
Price versus freight. Supply chain issues in FY22 caused freight costs to increase. GWA was able to negate this with a ~3% price rise in July 2021 followed by a ~4% price rise in Australia in December 2021. GWA is expecting freight costs to increase by $6-8 million in FY23f but is hoping a 5% price rise implemented on 1 July 2022 will again offset the impact. Advertising and promotion costs that were deferred in FY22 may add $5-6 million of cost in FY23f.
Inventory. To avoid any supply chain disruptions and disappointed customers, GWA boosted its working capital in FY22 resulting in a fall in net operating cashflow. This is expected to unwind through FY23f on the assumption that detached housing completions remain robust.
GWA’s balance sheet remains healthy despite the lift in inventory for FY23f. Net debt as at 30 June 2022 of $138.2 million represents gearing of 26.2% and a leverage ratio of 1.7x.
Investment view
Australia represented 81% of group sales in FY22 and continues to benefit from a robust additions and alterations segment in both commercial and residential. This segment constitutes about 61% of GWA’s Australian revenue with Commercial around 21%. Total building activity in Australia, as measured by BIS Oxford, is expected to increase by around 3% in FY23.
GWA has been able to increases prices to offset cost increases and in the process, it has also lifted EBIT margin to 17.9% in FY22. Along with the price increases, management is targeting some volume lift in FY23f and potentially some further margin improvement.
A strategic review has been completed on how to improve the company’s market position. The brand portfolio is ‘top 10’ in Australasia, so the real opportunity appears to be better engagement with up to 25k of Australasia’s 36k plumbers.
New Zealand fared poorly for GWA in FY22 mainly due to COVID impacts on staff shortages and lockdown impacts during the year. These effects should recover in FY23f subject to any recurrences of restrictions.
GWA has a dividend payout target range of 65-85% of earnings. Based on consensus earnings forecasts, the average net dividend yield is 7.9% over the next three years. Dividends are fully franked taking the gross yield to 12.6%. Consensus earnings forecasts are anticipating only modest gains but a PE ratio near 10x for FY23f is not demanding.
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.
FIGURE 1: INVENTORY/COST OF GOODS SOLD
FIGURE 2: EBIT MARGIN
