Reece Group (REH)
HOLD

Sitting tight

 23 Aug 2023
Sector: Industrials

RESULTS ANALYSIS

Need To Know

  • CEO: "Markets are clearly softening".
  • REH is unfazed given its long term attitude.
  • PER over 30x keeps our recommendation at Hold.

Investment Implications

FY23 results overview (vs consensus):

Revenue up 16% to $8,840m vs $8,571m

EBITDA up 16% to $975m vs $937m

Final dividend 17cps. Full year 25cps vs 22cps

FY23 underlying net profit of $405m was up 11% on last year and broadly in-line with the market. The year was generally successful with double-digit increases in all financial metrics. Operating and free cash flow both improved substantially to $766m and $690m respectively as inventories and global supply chains normalised. Net working capital fell to 19% of sales from 22%.

The ANZ region was less busy than North America with sales up 10% and EBITDA up 9%. ANZ EBITDA increased 10% to $573m with margin steady at 15%.

North American business was sturdy with revenue in local currency up 12% as the store network widened by 27. EBITDA in USD increased 19% to US$269m which translated to a 29% increase in AUD. After five years in the US, REH is beginning to gain traction with its Reece brand and the future looks good in the ‘sun-belt’ southern states.

Outlook. REH says inflation is moderating and demand is uncertain. That is a recipe for weak demand forcing REH to focus hard on cost management although the company says it ‘does not change in a downturn’. REH will maintain capex at 2-3% of sales with investment prioritised to refurbishments (ANZ stores 655, North America 231) and supply chain. REH sees the moderation in activity as cyclical as its long term fundamental view remains positive.

Investment View

REH has a well-established presence in the plumbing and bathroom industry in Australia and New Zealand. The expansion to the USA brings new challenges in a more competitive market, but REH is demonstrating persistence (its family DNA) to expand and introduce its brand and processes. A cyclical downturn in activity clearly does not phase this family-influenced business (Wilson family owns 58%) which has a track record over 100 years. Investors may balk at the PER over 30x and we concur leaving our recommendation at Hold.

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Stock Overview

Share Price

Company Overview

REH is an Australian supplier of plumbing, bathroom, ventilation, air-conditioning and waterworks products. It serves the trade, retail, commercial markets with a wide range of products, including tapware, vanities, showers and more.

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