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Morningstar | Narrow-Moat GWA Group Acquires NZ Methven at Top of Cycle; FVE Unchanged. See Updated Analyst Note from 13 Dec 2018

Our fair value estimate for narrow-moat GWA Group is unaffected by the acquisition of NZX-listed Methven. GWA Group will pay NZD 118 million, or NZD 1.60 per share, representing a 39% premium over Methven’s Dec. 13 closing price. The transaction therefore proceeds at 10.1 times EV/EBITDA or 7.4 times inclusive of deal synergies. Nonetheless, we believe GWA have paid a fair price with the deal value neutral for GWA shareholders. With Methven’s board unanimously recommending its shareholders vote in favour, we expect the deal to close in late March. We reiterate our AUD 2.80 per share fair value estimate for GWA Group, noting that shares continue to screen as fairly valued.

Methven designs and manufactures showers, taps and valves for residential renovation and construction markets in New Zealand, Australia and the U.K. Revenue is heavily skewed to the residential alteration and addition, A&A, segment. Methven’s top line is therefore expected to show resilience and register a five-year CAGR of 3.8%, despite a cooling construction outlook in its two largest markets--Australia and New Zealand. Despite this, we note unprecedented construction activity in Australia and New Zealand in recent years. Should A&A volumes prove less resilient in the coming two years than expected, value created under the deal could easily evaporate. Nonetheless, inclusion of Methven revenue boosts our expected five-year sales CAGR to 7.8%, up from a prior 2.0%. We forecast operating margins to average 17.7% over the coming five years, down from a prior 21.7%, following inclusion of lower-margin Methven earnings.

GWA’s balance sheet will remain sound upon closing of the all-cash deal. We forecast net debt/EBITDA of 1.4 times at fiscal 2019 year-end, up marginally from 1.2 times in fiscal 2018. The deal will be majority-funded with proceeds of about AUD 91 million from the recent sale of the door business, with existing debt facilities for the remainder.

An initial NZD 5 million in deal synergies have been identified but management assert they expect to deliver above this level. Given the share price reaction, which rallied around AUD 0.14 per share following the announcement, the market sees this as possible. We remain conservative, however, factoring only the NZD 5 million in synergies announced today into our forward estimates which deliver a slim AUD 0.02 per share of incremental value to GWA shareholders.