Repair and maintenance activity remains strong across most geographies for RWC, but there is a gap between the timing of cost rises and the company’s ability to pass these on through price rises. The headwinds are breezy, but RWC is still achieving good results, particularly in North America.
Third quarter revenue for the Americas division confirms that underlying demand is strong. The legacy business (excluding EZ-FLO) saw underlying sales growth of 22% adjusting for the US$31 million Texas winter freeze event, well ahead of the 12% growth in 1H22. It also implies that volume growth has accelerated through the year. We believe that the pro customer is converting a big backlog which will support volumes for the rest of the year and into FY23f. RWC has maintained a healthy lead against competitors when it comes to keeping its customers supplied and this is important in retaining good customer relationships.
The Asia-Pacific division saw a decline in earnings with EBITDA down 29.1%. Management explained that in the 9-months to March 2022, there was an $8 million impact from lower intercompany sales and profit-in-stock. We note that the prior period had been particularly busy as production levels ramped up to service the freeze event in the USA. Margins should improve in 4Q22 assuming a seasonally stronger period and further impact from price increases.
In Europe, a temporary disruption from RWC outsourcing its warehousing and logistics function impacted revenue by about €3.2 million. This impact should be recovered in 4Q22.
Investment view
The revenue line for RWC is generally in good shape as activity continues to be brisk. The challenge for the company is to manage the rising level of costs by implementing price increases as soon as practicable to eliminate the time gap which has put pressure on margins. Continued cost inflation, according to management, will land the EBITDA margin firmly in the mid-20% range.
Risks to investment view
On-going uncertainty relating to supply chain issues and further COVID disruptions could be detrimental to earnings growth. Higher input prices might not be able to be passed on to customers and this would also hurt earnings.
Recommendation
We have retained our Buy recommendation
