24 February 2020
RWC ANNOUNCES RESULTS FOR SIX MONTHS ENDED 31 DECEMBER 2019
Reliance reported a weak result, particular at the earnings line. Revenue was decent at 5% growth, but flat in constant currency. Reported EBITDA was down 2% (adjusted EBITDA down 8%) and Reported NPAT was down 22% (adjusted NPAT down 21%).
There was a significant deterioration in margin this period at both the EBITDA and NPAT lines. The USA cycled a strong sales period (14% in the pcp) as the market prepared for a winter freeze that did not reoccur in 2018/2019. In this regard, flat sales across the group is respectable.
In addition to flat sales, EBITDA margin was soft due to:
NPAT was down significantly due to, effectively, incorrect estimates of tax to be paid in prior periods. The restatement in the current period gave rise to an adjustment of $5.7m and a tax expense of $5.7m recognised in the tax payable line in this period. This blew out the effective rate to 40%.
On the conference call, management commented on market share gains in SharkBite in the USA despite the movements by Fergusons. Revenue in the USA has always been lumpy and it depends on what is going on with new outlets, users, products etc. in FY19, half on half was drastically different. So taking out the one offs from the prior period growth was in the low single digits. This should be expected to go forward. Expect 2 completely different halves this year.
New products have always been important for the business and when you consider SharkBite compared to the overall business it is a smaller percentage as it used to be so absolutely the growth of those new products will become proportionally more important going forward. That said, SharkBite’s strong growth underpins the business and there is still a big runway for growth left in the story.
RWC downgraded guidance by 8% at the midpoint from NPAT of $140m-$150m, down from. $150-165m. This implies EBITDA of $265-280 (post lease accounting impacts).
Long term thesis remains intact and valuation remains supportive with a sharp PE contraction from 23x to 19x resulting in a 25% sell off on an 8% NPAT downgrade.