Consumer Discretionary

Reece's stretched valuation is a 'long drop' for brokers

Thu 03 Mar 22, 12:18pm (AEST)
image

Stocks in article

reh
MktCap:
-

Share article

Key Points

  • Majority of future growth to come from new US operations
  • Increased US stores to 201, up from 189 in FY2021
  • Customers are “busier" than ever

Investors in Reece Ltd (ASX: REH) have endured a rocky ride since February 24, when the group reported firm earnings and operational results for first half FY22 that were nonetheless panned by analysts as not good enough to justify its stretched market valuation.

The shares slid about -5% on the day, to a day low of $19, and have traded mostly sideways since, but opened slightly higher this morning (0.71%).

Limp price movements reflect the market’s struggle with the bathroom and plumbing supplier’s valuation.

Highlights at the half year included:

  • Group revenue up 17% to $3.5bn

  • US revenue up 24% to $1.9bn

  • Net profit after tax up 28% to $157m

  • Margins falling in Australia/NZ

  • Input cost inflation in period up 8-9% in Australia/NZ, up to “low teens” in US 

  • Switch to “Reece” branding in the US has started

  • Interim dividend of 7.5 cents per share, fully franked, up 25%

US growth

Reece, which generates about half its revenue from its US operations, now has 201 stores in the country after entering the market 5 years ago with its $1.9bn purchase of Morsco, a Texas-based plumbing supplier.

The majority of its future growth is expected to come from the US, where the plumbing supplies market is still highly fragmented. The top five players are understood to have a combined share of circa 31% of the estimated US$32bn market.

Lack of market concentration represents an opportunity for Reece to consolidate, as it has done in Australia in recent decades.

The geographic distribution of Reece’s US stores is concentrated on the southern Sun-Belt states, where population growth and new home construction has typically been higher.

Reece group CEO Peter Wilson confirmed the rollout of its “Reece” brand during the half-year, and also launched a version of its maX customer interface platform tailored to the US market. 

Positive demand drivers

Wilson is optimistic about the demand drivers in the second half across all of its geographic areas.

“Our customers are still busier than ever and construction activity remains solid in the near term."

The company expects new dwelling approvals in Australia and NZ to start increasing again after declining in 2018-20, reaching 244,000 by 2023. New home completions should increase from 181,000 in FY21, to 211,000 by 2023.

In the US, Reece expects single and multi-family dwelling construction starts to rise from nearly 1.4m seen in 2020 to 1.83m by 2023; water supply construction spending is estimated to grow to US$22.7b, from US$18.5bn in 2020.

What brokers think

Morgan Stanley described the results as better-than-expected, but the valuation “still looks stretched”, but raises its target price to $20.10 from $18.40. (28/02/22).

Citi saw the half year FY22 result as well above expectations, but with too high a valuation. It retained its Sell recommendation, with a lower target price to $16.83 from $18. (28/02/22).

Consensus on Reece is Moderate sell.

Based on Morningstar’s fair value of $21.64, the stock looks undervalued.

 

 

Written By

Ben Seeder

Journalist

Ben is a freelance contributing editor based in Tasmania. He has a Bachelor's Degree in Journalism and Government from the University of Queensland, and is a small-cap stock-picker.

Get the latest news and media direct to your inbox

Sign up FREE