Reliance Worldwide (RWC) | North America resilient; UK/Europe severely impacted
In a nutshell: RWC provided an update on the impact of COVID-19 on its operations. At this stage, its US and Australian operations remain largely unaffected; however, demand within in its UK and European operations is down 60-65%. While the company’s financial position remains strong, given a high degree of uncertainty to future earnings, we downgrade to HOLD from Buy.
North America: RWC’s manufacturing operations in North America remain largely unaffected, thus far. Revenue in the US continues to track broadly in line with company expectations (mid-single digit). A review of costs in its North American operations has resulted in a reduction of approximately 20 permanent roles across RWC’s US operations. Sales in Canada, however, have been impacted by restrictions imposed.
Australia: In Australia, there has been no significant deterioration in demand. However, most economic forecasts are indicating a decline in new housing construction over the next year. Approximately 50% of RWC sales in Australia are exposed to new housing. As a result, management have scaled back manufacturing from 5 days to 4 days a week (commencing 11 May). Customer service and warehouse activities continue to operate on a 5 day per week basis.
UK and Europe negatively impacted: In early April, RWC announced 40% of its UK workforce had been placed on furlough, which enabled employees to receive salary support offered by the UK Government. Activity in both the UK and Europe remains subdued. RWC’s UK distributors continue to operate on a restricted and limited service basis. Aggregate demand in EMEA is currently running at 60-65% lower than the pcp. As such, RWC employees in Europe have similarly been placed on furlough.
Investment view: Overall, Reliance should be a highly defensive company, given its primary exposure to the repair and remodel markets. While Australia and North American operations remain resilient, its European operations have been significantly disrupted. We have lowered our FY20/FY21/FY22 earnings by 8.7%/8.8%/8.4% respectively. We downgrade to Hold, from Buy, seeking more clarity on a stabilisation of its European operations. Click here to read full report