Reliance Worldwide Corporation announced it will acquire EZ-FLO International, a sensible move that will deploy capital to enhance the company's earnings growth profile. The company's quarterly trading update showed the business is coping with higher input costs and the revenue growth outlook is bright.
Responding to the market's desire for acquisition activity, RWC announced it has agreed to acquire EZ-FLO International, a US manufacturer and distributor of plumbing supplies. The US$325 million price reflects a 12.0x multiple of pro forma adjusted EBITDA before synergies of US$10 million. RWC says the multiple reduces to 7.0x including the expected synergies by FY24f.
EZ-FLO's products are manufactured in China, unlike RWC which principally manufactures its North American products in the US. About half of EZ-FLO's sales are manufactured by its own facilities, 20% by exclusive manufacturers and the balance from non-exclusive third-party providers.
If RWC can successfully integrate this business, it could be more than 10% EPS accretive in year 1 of ownership. RWC has shown an ability to absorb new businesses in the past providing confidence in doing so again.
The company's trading update for the first quarter of FY22f revealed group sales growth of 8.3% and expected margin contraction from rising input costs. The North American business delivered revenue growth of 4.5% but would have been closer to 12% if not for the change in the Lowe's distribution method to a cross-dock approach.
RWC was able to offset some of the EBITDA margin contraction caused by rising input costs, with price increases around 6%. Supply chain impacts on raw materials and components held back sales growth.
The underlying demand profile in North America is tracking strongly and is being supported by better sales growth out of Continental Europe and Asia Pacific.
A risk to the earnings outlook is the potential for currently elevated sales to ease, but this view is not supported by the anecdotal comments from RWC's major US customers.
Investment view
The EZ-FLO acquisition looks positive for RWC with a good growth profile and is a sensible fit for RWC's business. There is some work to do to ensure delivery of the synergies but RWC has a good track record in this regard.
The trading update suggests the existing business is doing well and benefitting from strong demand conditions in North America.
We have retained our Hold recommendation on RWC but with a positive bias given the upbeat trading update.
Investors should note that RWC will begin reporting its financial results in USD at the 1H22 result.
