Attention is on the North American division where underlying demand is OK for now. But there is movement at the station on channel inventories for some distributors making underlying demand difficult ascertain. This is raising the risk level to revenue and earnings, so we downgrade our recommendation to Hold.
RWC’s FY22 revenue increased 17% to US$1,172 million. Americas revenue increased 26% including an initial contribution from EZ-FLO together with some price increases implemented during the year.
What drew the market’s attention, however, was the 3% group sales fall in July 2022. Some wholesale customers in the Americas have reduced inventory levels recently and the OEM channel had a significant destocking event in July that affected a customer set that represents about 9% of RWC’s Americas sales. Further inventory shifts in the hardware and wholesale channels is anticipated but ‘how big’ and ‘when’ remain unanswered questions. The big picture suggests a volume headwind in 1H23f created by channel destocking. It is also reasonable to assume that the demand backdrop may fall away in 2H23f.
Management says the short term demand outlook for key markets remains ‘satisfactory’ and that the retail channel is at normal levels. There are no visible signs of demand erosion yet, which is encouraging given the significant price increases pushed through the channel.
The impact of price increases to recover cost increases was a meaningful drag on FY22 margin performance of approximately 200bp. This trend may persist in FY23f, so we expect further margin decline. Some planned price increases in the UK and higher price realisation in the US retail channel could be positive for FY23f.
After a tough start, the EZ-FLO acquisition is coming good. This business gives RWC the capability to serve the large appliance connector market which sits adjacent to RWC’s core plumbing end-markets throughout America.
Investment view
The falling visibility on demand in the Americas is creating some concern over margin performance and hence earnings. The demand situation looks alright for now, but rising costs are proving difficult to contain even after price increases have been passed through.
There is sufficient economic uncertainty across all markets to warrant some caution on RWC’s earnings outlook for FY23f.
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 reduced our recommendation to Hold.
FIGURE 1: FY22 RESULT
