Morningstar | GWA Shares Look Expensive With Formidable Competitors Eyeing Growth in Asia-Pacific Region
We increase our fair value estimate of narrow-moat GWA by 4% to AUD 2.90 per share, following a transfer of analyst. We continue to forecast a five-year sales CAGR of 6% inclusive of incremental revenues from the Methven acquisition. However, increasing competitive pressures for GWA’s bathrooms & kitchens segment lead us to reduce our EBIT margin expectations, which we expect to reach 18.5% at midcycle, down from 21.7% in fiscal 2018. But the valuation impact of our lowered margin expectations is offset by our revision to GWA’s estimated cost of capital, now estimated at 8.4%. GWA’s exit from manufacturing in fiscal 2015 will reduce group operating leverage lower in this coming cycle and we reduce our cost of equity assumption to 9% from 11% accordingly. While, we retain our narrow-moat and high uncertainty ratings, GWA shares screen as expensive, trading at a 25% premium to our fair value estimate.The Australian bathrooms & kitchens segment top-line is anticipated to grow at a 10-year CAGR of 2.0%. We expect falling segment revenue in fiscal 2019 through fiscal 2020 as residential construction activity recedes from fiscal 2018’s cyclical high of 230,000 starts. However, top-line growth should return in fiscal 2021 as the rate of decline in residential construction slows. While GWA’s offshore supply model significantly reduces the operating leverage within the segment’s cost structure. competitive pressures are expected to compress segment EBIT margins over the coming decade, falling to 22% at midcycle in fiscal 2028 from 25% in fiscal 2018. We expect the concerted efforts of the likes of Roca--global sanitary-ware industry leader--to grow sales in the Asia-Pacific region and other recent entrants into the Australian market to pressure GWA’s margins.
GWA Group is engaged in the research, design, manufacture, import and marketing of building fixtures and fittings to residential and commercial premises and the distribution of these various products through a range of distribution channels in Australia, New Zealand and selected international markets. Co.'s business segments are: Bathrooms and Kitchens, which includes vitreous china toilet suites, basins, plastic cisterns, tapware, baths, kitchen sinks, laundry tubs, and bathroom accessories; and Door and Access Systems, which includes door locks and levers and supply and maintenance of commercial door systems.
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