REH - Reece Limited

[System]

Reece Australia Limited (REH) is a supplier of bathroom and plumbing products with 438 trading outlets throughout Australia and New Zealand. REH operates in Bathroom Life showrooms and caters for more specialised industries through Irrigation, hvac-r and Civil businesses as well Onsite which services commercial plumbers and volume home builders.

http://www.reece.com.au

 

[piggybank]

Re: REH - Reece Australia

Up 13.4% (or just over $4) as a result of the announcement (below) made to the market today. The closing price of $33.99 is it highest ever close....

Reece Australia Limited (‘Reece’) is pleased to announce the signing of a binding share sale agreement for the purchase of 100% of the shares in Actrol Parts Holding Pty Ltd and its subsidiaries consisting of Actrol Parts and AC Components (trading as Metalflex) (together ‘Actrol Group’) for an all cash consideration of $280m. Actrol Group is a specialist industrial wholesale group providing components, units, systems and refrigerant gases to the Australian heating, ventilation, air conditioning and refrigeration (‘HVAC-R’) industry.

The Actrol Group comprises two operation divisions being:

● Actrol Parts - a leading trade distribution business focussing on commercial refrigeration, air conditioning and allied industries. Actrol Parts has 61 branches around Australia and, has been operating for over 70 years

and

● AC Components - one of Australia’s largest air-conditioning componentry and unit wholesalers focussed on residential applications. AC Components has 18 branches around Australia.

The acquisition of these businesses represents a unique and exciting opportunity for Reece to establish a presence in Australia’s refrigeration and air conditioning industries. Reece Chief Executive Officer, Peter Wilson, said, “Actrol Group has strong market positions across the commercial and residential HVAC-R markets and represents a compelling strategic fit with Reece. This acquisition will enable us to grow our wholesale trade business into these attractive markets and diversify our offering to our customers. This opportunity represents a strong fit with Reece’s values and vision for growth. I am excited to welcome the Actrol Groupto the Reece family”.

The transaction is subject to conditions precedent and is expected to be completed on 31 January 2014

 

[System]

On November 19th, 2015, Reece Australia Limited changed its name to Reece Limited.

 

[galumay]

I stumbled across Reece recently while researching another company, its always a pleasant surprise to find a quality company that meets all my criteria for investment that has flown under the radar and largely gone un-noticed!

Wondering if anyone else here has looked at REH and what their opinion was. I have added to my SMSF and will look to build a larger postion over time.

REH has almost no debt, strong growth, very high customer focus in the business, advanced business systems and some competitive advantage in the industry. It is basically a family business that is listed on the ASX, very tightly held by the founding family - a lot of skin in the game.

 

[McLovin]

My opinion is we are on the other side of a building boom in the east coast capitals, especially Sydney and Melbourne and REH is highly exposed to the cyclical nature of the building cycle. Everything started booming in the 2014 FY which is also when the current cycle begun. There's a lot of talk about banks tightening lending standards and developers getting stuck with stock, as well prices being dampened in the next couple of years as tonnes of new supply comes on line. The magnitude of the current construction boom is big. I'd be pretty wary of a construction exposed stock at 23x earnings.

Cyclicals are best bought at the bottom of the cycle.

 

[Klogg]

The magnitude of the current construction boom is big...

I've checked out apartment approval vs completion numbers (for Sydney/Melbourne), and the two seem a fair way off (Approvals > Completions by a fair way). If they're accurate, there's a fair bit more construction to be had before we hit the peak.
What I'm not sure about is how currently approved projects will respond. Will they continue with construction or can the project, leading to a peak sooner than later?

I ask because I'm trying to judge if we've hit the peak just yet.


I'll try and find the graphs again. Can't remember if they were from an RBA pack or elsewhere.
(Should be easy, but just trying to find them broken down by state)

EDIT: This link has VIC/NSW stats, incl graphs for completions and approvals:
http://www.macrobusiness.com.au/2016/07/mining-states-shoot-for-big-dwelling-gluts/
(Take the rest with a grain of salt... It is MB after all)

2nd EDIT: The graphs probably answer my question as they also list commencements (in line with approvals). But would be great to know your thoughts anyway - always worthwhile.

 

[galumay]

Thanks for the thoughts guys, I agree there is risk with the eventual downturn but I think that REH is well positioned to weather it better than most. I understand the point about earnings multiples but the growth has also been very strong.

 

[Klogg]

Thanks for the thoughts guys, I agree there is risk with the eventual downturn but I think that REH is well positioned to weather it better than most. I understand the point about earnings multiples but the growth has also been very strong.

I guess my only question is - have they increased market share for this growth?
If not, it can only point to an increase in market size, leaving it susceptible to a cyclical downturn. (The industry is unarguably cyclical)

Take a look at MND. It's swimming in cash, better placed than any to whether a downturn. It doesn't necessarily mean investors made money buying near the peak.

 

[McLovin]

I guess my only question is - have they increased market share for this growth?
If not, it can only point to an increase in market size, leaving it susceptible to a cyclical downturn. (The industry is unarguably cyclical)

Take a look at MND. It's swimming in cash, better placed than any to whether a downturn. It doesn't necessarily mean investors made money buying near the peak.

This is pretty much my point, you've said it more succinctly than my first blabbering post!

From the low point in 2012 to now there has not been a construction boom of the same magnitude (since 83 anyway). Even if we have reached a new normal level of construction, it's hard to justify the current price, unless REH is taking more market share. But in that case you'd need to be pretty confident about splitting out the cyclical growth from the business growth.

 

[luutzu]

When I looked at it some 5 years ago, before the latest boom, it was pretty expensive then. It doesn't look like it's cheaper now.

On the business side of Reece... I've been involved in building two houses and I never buy anything from them. None of the tradies I know ever buy from them.

Their stuff are just too expensive.

A toilet or a basin were at least $550 or $600 each. A tap of theirs was at least $350.

Builders and tradies will never buy those unless the owner already bought them home. But the way most jobs are done, builders and tradies include toilets and bathroom wares in their pricing - and so they always go to local suppliers that sell very similar stuff for 20% Reece's RRP. A 20% off for tradies on Reece's price won't even come close to that.

In terms of service and stuff... I have gone to two different stores and each time their trade sales people treat me as if I'm wasting their time. I get more advice and friendlier service at Bunnings.

Speaking of which... all the standard pipes and connectors tradies and weekend warriors ever need can be bought cheaply at Bunnings or even a local plumbing supplier.

So for the basic plumbing supplies for new buildings, they're competing with the likes of Bunnings; for the finer finished basins and baths... they're competing with dozens of Arab, Chinese, Italian bath/tile suppliers.


The only thing they got going for them is the printout and verification of sewer mains for each DA/CC applications. With a couple of stamps and an A4 sheet printout they charge some $25+GSt.

 

[Ves]

This is an A-Grade company in my box. Ticks most boxes without digging very deep (for some reason I never did, because it always looks superficially expensive).

The economic / housing cycle definitely affects this company. Not sure if there is a degree of "non cyclical" products in their range either. I am sure some plumbing stuff gets done regardless of the economic cycle.

But there's something else going on behind the scenes that needs investigation.

Reece has gone through a very long period of expanding their geographic reach over its extensive history.

I don't think these stores are quite like opening a new McDonalds or a new Just Jeans or similar.

I have a feeling new stores take a while to mature. Given that they probably take a while to ramp up and assuming not all of the network is mature yet, how much organic growth is still to come to offset any change in the earnings cycle? And how much more of an expansion runway do they have left in Australia?

 

[luutzu]

This is an A-Grade company in my box. Ticks most boxes without digging very deep (for some reason I never did, because it always looks superficially expensive).

The economic / housing cycle definitely affects this company. Not sure if there is a degree of "non cyclical" products in their range either. I am sure some plumbing stuff gets done regardless of the economic cycle.

But there's something else going on behind the scenes that needs investigation.

Reece has gone through a very long period of expanding their geographic reach over its extensive history.

I don't think these stores are quite like opening a new McDonalds or a new Just Jeans or similar.

I have a feeling new stores take a while to mature. Given that they probably take a while to ramp up and assuming not all of the network is mature yet, how much organic growth is still to come to offset any change in the earnings cycle? And how much more of an expansion runway do they have left in Australia?

A quick look and some magic later, it seem the market is expecting Reece to grow its earnings at about 7.2% annually.

This is in line with its sales growth past decade according to latest commsec report on it. But can this pace continue for the next 7 to 10 years?

I doubt it. It might do alright next couple of years as the property boom continues, but will stumble big time once cheap credit is over and the current building binge coughs up a bunch of apartments all over the place.

Reece is a more specialised Bunnings warehouse. Its growth largely depends on housing and construction. Housing and construction are fuelled by the crazy interest environment we're in. How long will interest rate be at this zero level?

So it might be able to diversify in time, ride the current boom to new markets... but right now doesn't seem like the time to buy and forget.

 

[Klogg]

This is an A-Grade company in my box. Ticks most boxes without digging very deep (for some reason I never did, because it always looks superficially expensive).

Also my problem, but I figure I should start in industries that are in a downturn, rather than start on those potentially at their peak.

The economic / housing cycle definitely affects this company. Not sure if there is a degree of "non cyclical" products in their range either. I am sure some plumbing stuff gets done regardless of the economic cycle.

There would definitely be a level of sales that are not effected, but this is much the same as any industry I would imagine. Some things just don't fluctuate. I can't imagine there's a lot of it though.

Given that they probably take a while to ramp up and assuming not all of the network is mature yet, how much organic growth is still to come to offset any change in the earnings cycle? And how much more of an expansion runway do they have left in Australia?

I guess you could counter this with the fact that in a downturn in that particular industry, it'll take longer for those stores to reach the required level of sales. In that case, they'll act as a drag on earnings for a little longer than in boom times.

Just a theory, can't say I've looked at their history to verify this. (I really should stop speculating and do some hard work on it, lol)



On most metrics though, it's a superior business.

 

[galumay]

None of the tradies I know ever buy from them.

Their stuff are just too expensive.

2 points there, revenue was over $2b last year, someones buying the odd tap from them! Maybe you just dont mix with the right tradies!

The fact that they also market a lot of high end bathroom fixtures may actually help them in a housing downturn - the top end of town is always the least affected.

They also have their plumbing, irrigation, civil and refrigeration sectors.

You have focussed on the bathroom, retail section of the business, but there is a lot more to Reece than just that.

 

[skc]

Thanks for the thoughts guys, I agree there is risk with the eventual downturn but I think that REH is well positioned to weather it better than most. I understand the point about earnings multiples but the growth has also been very strong.

As most already mentioned here, REH is a good business albeit cyclical. You don't need to look that far back to see that earnings were pretty flat between 2007-2014 (No the GFC didn't help obviously) and the market rated it accordingly (I think was PE was as low as 15-16 back in as recently as 2012/2013). So it's entirely possible that it could head back down there, perhaps with a higher "base" earning (your guess as good as mine).

For companies with the same exposure but different track record and current price, look at GWA and RWC. You may have already.

 

[luutzu]

2 points there, revenue was over $2b last year, someones buying the odd tap from them! Maybe you just dont mix with the right tradies!

The fact that they also market a lot of high end bathroom fixtures may actually help them in a housing downturn - the top end of town is always the least affected.

They also have their plumbing, irrigation, civil and refrigeration sectors.

You have focussed on the bathroom, retail section of the business, but there is a lot more to Reece than just that.

Yea I haven't looked into Reece last couple years so it could have expanded into other businesses beside the usual plumbing, bath business. Though I'm aware of its refrigeration acquisition.

True I hang around the poorer end of town who won't be paying $550 for a toilet when a $135 knock-off from China look just as nice and do the same job - soft closing seat and double flush too

But as for tradies and the plumbers, Reece's "infrastructure" side of business are very comparable to all other suppliers. I mean, a 100mm sewage pipe underground is just that - meet Australian standards and no one much care for brand.

So there's those commodity-like pricing on those pipes and connectors; on the high-end quality products it's also competing with the likes of Harvey Norman and poshy Italian bathroom centres.


What Reece got going for it now, beside the property/development boom, is also the much lower copper and oil prices. Most of plumbing supplies are from plastic/oil resin and copper/brass pipes and fittings.

So it has a lot of wind behind it, but yea, just my two cents.

 

[galumay]

A good half year report for REH, Revenue, EBIT & NPAT all up 10%, divvy up 7.5%. As you may know they did a 5-1 split earlier in the year, which has probably helped boost the SP a little.

I understood other posters reservations about buying in when I did, on the basis of the cyclical nature of the business, but in reality you will wait a long time before REH is 'cheap'. I am now up about 8% in SP over 6 months, it doesnt take long to build a buffer for cyclical markets if you can increase capital at that rate. I just think sometimes if you wait for buying opportunities with these sort of companies you will spend a hell of a long time in the sidelines. Obviously you need conviction that its a wonderful business if you are going to pay fair value for a position.

 

[galumay]

REH announced a large acquisition today, offering nearly $2b for US company MORSCO who operate a very similar business in the US. A "Fully underwritten 1 for 11 pro-rata accelerated non-renounceable entitlement offer for retail shareholders" as well as an institutional offer and new debt raising in the US will finance the acquisiton. Retail offer is at $9.30 so about a 13.5% discount to last close.

I havent really had time to fully digest the acquisition and SPP, so not sure how I feel about it. My initial reaction is that ASX companies that have tried to expand into the US havent had a great track record for shareholders!

 

[peter2]

The chart is interestingly bullish. Price has been going sideways for the last three months. The higher lows makes an ascending triangle pattern. Two notes of caution; the average daily volume is low and this means price can get volatile when sentiment changes, scheduled news at 30/8/18 should provide further details about the recent acquisition and it's settling in.

 

[galumay]

I really dont think we will be able to glean much from this year, @peter2. Its far too soon to see any real impact from the acquisition. From a fundamental point of view its just an awesome business, with an exraordinary track record. It seemed an odd decision to move into the US market, but given management's track record I think most shareholders, like me, have given REH the benefit of the doubt, added to our positions and continued to hold.

Its the sort of business that could be single holding in a portfolio and I reckon I would still sleep well at night!