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Morningstar | Market Share Gains Offset Weakening External Environment For GWA Group in 1H 2019; FVE Unchanged

Market share gains offset an otherwise tepid external environment for narrow-moat GWA Group in first-half fiscal 2019, leading to 2.6% top-line growth in an otherwise flat bathroom and kitchen fixtures and fittings market. While we’ve modestly upgraded our full-year top-line expectations by a marginal 20 basis points and now expect 8.4% sales growth in fiscal 2019, including Methven, our full-year EBIT expectations of AUD 77.4 million remain largely unchanged. Our fair value estimate of AUD 2.80 per share remains intact. GWA Group shares screen as expensive following the recent share price recovery, trading at an approximate 20% premium to our valuation.

We estimate sales volumes in GWA’s bathrooms and kitchens operating segment grew at a touch below 1% in the first half. This was a good result given flat market growth during the period. The Australian alteration and addition, or A&A, market grew at a tepid 1% in the half year, while detached and multi-family completions fell 4% and 9%, respectively. While A&A market volumes appeared slightly soft relative to our expectations, falls observed in new construction broadly track our expectations. We’ve marginally increased our full-year top-line growth forecast to account for first-half share gains and announced price increases which take effect in May 2019. We now expect top-line growth of 1.3% in fiscal 2019, excluding Methven, up from a prior 0.7%. A first-half EBIT margin of 21.2% was in line with fiscal 2018 and also tracked our expectations for the existing GWA business. However, we continue to expect group margins to ease in the second half as lower margin sales from Methven contribute. Therefore, we forecast a full-year EBIT margin of slightly below 20%.

First-half operating cash flow benefited from GWA’s transition to its new distribution centre where inventory management has improved while reduced debtor days also contributed to the release of AUD 10.9 million in capital from working capital. These improvements largely track our expectations. Taken together, we expect GWA’s cash conversion cycle to improve to approximately around 97 days in fiscal 2019, down from approximately 109 in fiscal 2018.

GWA’s balance sheet remains in a net cash position at half-year end following the divestment of the door & access business in July 2018. We continue to expect the balance sheet to remain strong following the closing of the Methven deal, with net debt/EBITDA of 1.3 times expected at fiscal 2019 year-end, up only marginally from 1.2 times at fiscal 2018 year-end.