Headwind Relief?

FY23 RESULT PREVIEW

Need To Know

• Share price assumes a difficult housing cycle. PER 10x, a 50% discount to the long-term average
• COVID distortions weigh on both earnings and investor sentiment.  International freight cost headwinds totalled ~$20m 2022/23, key customer destocking impacted sales in 1H23
• FY23 result 14 August. If the company can talk to an easing of external pressures, the earnings multiple can re-rate.

Investment Implications

GWA share price has underperformed peer-building material stocks over the last two years. The headwinds from key customer destocking (lower inventory in key product ranges like Caroma, Clark), materially higher freight costs (both international and domestic) and concerns around a housing activity slowdown have weighed on both earnings and PER multiple.

Across 2022/23 GWA absorbed >$20m global and domestic freight headwinds. This is a material cost impost across an EBIT base of ~$72m the market is forecasting for FY23E.

Globally, freight costs are now below pre-COVID levels, suggesting that GWA should begin to see a cost-benefit. To be sure, this will happen over several periods given the mixture of international, domestic and long-term freight contracts that GWA has in place.

If GWA can talk to lower freight costs, we think the share price can re-re-rate from current depressed levels of 10x PER. Both CSR and JHX have seen PER multiples expand by 40% and 50% respectively since multiples troughed in 2022.  GWA has been left behind.

Investment View

As a mid-sized industrial building material company, GWA is exposed to Australia/NZ housing cycle. The company has a strong position with leading plumbing and tapware distributors in Australia/NZ. The company can earn a return on capital above its cost of capital throughout the business cycle.

Earnings multiples remain depressed as do earnings, with COVID impacts, particularly freight costs weighing on earnings at present. In our view, much of the higher freight costs should unwind over coming periods. This could provide a material boost to market earnings estimates, which currently imply <$5m of EBIT improvement in FY24E.

We have seen with peer-building material companies, the share price and PER multiple will re-rate well before the actual earnings improvement is delivered.  GWA has modest gearing (<2x ND/EBITDA) and a historically strong dividend policy with a guided range of 65-85%, with FY23 expected to come in at 13cps or 75% payout. We rate GWA a Buy.