Reece Limited (Reece, the Group, ASX: REH) is a leading distributor of plumbing and bathroom products to commercial and residential customers through 904 branches across Australia, New Zealand, and the United States. Established in 1920 when the Founder Harold Reece commenced selling hardware products from the back of his truck, Reece today is Australia’s largest supplier of plumbing and bathroom products. Reece listed on the Australian Securities Exchange on 1 January 1974 and today the Group has 9,000 employees.
Reece entered the US market in 2018 and today has 243 stores in the US, compared to 661 branches in Australia and New Zealand.
US housing starts are currently running at approximately 1.3 million (annualised), compared to 165,000 (annualised) in Australia; in other words, the US housing market for new builds is 7 times the size of the Australian market. This explains why the Reece growth strategy is firmly aligned to embedding the fundamentals of the Reece business model and brand identity across the Group’s US business.
US sales revenue in FY24 was A$5.3 billion, compared to A$3.8 billion in Australia and New Zealand. Adjusted FY24 EBITDA in the US was A$447 million at a margin of 8.5 percent. This compares to a 14.5 percent EBITDA margin for Australia and New Zealand (ANZ) in FY24, resulting in EBITDA of A$560 million in FY24. These figures imply that there is ample opportunity for US margins to move materially higher in future years by matching EBITDA margins achieved in ANZ. The potential for higher operating margins on US revenue in a market seven times the size of the Australia market suggests that the US store roll out is the growth platform for the long-term.
While Reece continues to build its presence in the less cyclical repair & renovation market, this business segment currently accounts for only about 20 percent of US revenue. This proportion is likely to increase significantly in the next several years.
In Australia, the housing back log for new builds has been worked through and the overall trading environment is challenging. Similarly in the US region, sales are flat with mixed demand across end markets. In Australian dollar terms, sales are up about 5 percent, benefiting from the favourable exchange rate impact of the strong US dollar since the Trump election victory.
Reece is not expecting an imminent change in demand setting in the near-term. However, the Group is continuing to invest in organic growth through the cycle to build a better business for the future. Reece has invested in 15 refurbishments, 10 relocations, and a net 6 new stores in Australia and New Zealand in FY24. Concurrently, the US branch network has been expanded by 15 new branches and four refurbishments. In Australia and New Zealand, Reece’s branch network density is the Group’s durable competitive edge that supports its market leading position. A similar growth strategy over the long-term appears to be in train in the US.
The long-term fundamentals for Reece are positive, particularly given the housing underbuild in Australia, the nation’s strong population growth, and the ongoing need for infrastructure investment in Australia and the US. So, the key issue for investors is less about the level of product demand today, and more about how well positioned Reece is for the future.
Reece is well prepared for when the market recovers to deliver long-term earnings growth by leveraging its existing comprehensive ANZ branch network and to capture significant organic growth in the vast addressable plumbing and bathroom products market in the US.
In a first quarter Trading Update released at the October AGM management stated that first quarter sales for the Group were down 5 percent to $2.2 billion.
Anticipated first half year of FY25 Adjusted EBIT is expected to be 15 percent less than first half of FY24 Adjusted EBIT of A$367 million. First half of FY25 Adjusted EBIT is estimated in the range of A$300 million -A$320 million.
Reece continues to build out its presence in the less cyclical repair & renovation market both in ANZ and the US. This sector currently represents just 20 percent of US revenue and has the positive effect of reducing earnings volatility often associated with the highly cyclical newbuild sector.
Reece is well placed for when the housing and commercial markets recover to resume consistent long-term earnings growth, resulting in higher dividends and if surplus free cash flow exists, through share buy-backs.
Michael Kodari is a globally recognised investor, philanthropist, and leading financial markets expert, renowned for his exceptional performance. With a strong foundation in financial markets, Michael has advised leading financial institutions and governments.
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