EUR 850.00 For Business Accounts Only

Morningstar | Reliance Will Continue To Benefit From Continued Category Share Gains Despite Competitors Emerging. See Updated Analyst Note from 22 May 2019

We raise our fair value estimate for no-moat Reliance Worldwide by 17% to AUD 4.20 per share following a transfer of covering analyst. Much of the revision in our fair value estimate relates to our revised cost of capital assumption, which we now estimate at 8.3%, down from the prior 9.9%. A reassessment of operating leverage in Reliance’s cost structure has resulted in our revision. We now anticipate a five-year sales CAGR of 14%, inclusive of John Guest revenues in fiscal 2019, down from a prior 16%. Following the latest share price weakness, value has emerged in Reliance, with shares trading at an approximate 15% discount to our fair value estimate.

Continued gains in category share for push-to-connect (PTC) fittings and PEX plumbing pipe, combined with stable market shares over the forecast period, drive our strong top-line growth expectations. We anticipate PTC will continue to take greater share of the U.S. plumbing fittings market, with the category reaching 25% over the next decade, up from a current 12% category share. We expect Reliance to retain its current U.S. market share, estimated at 90% of the PTC fittings category. The top-line also benefits from increased penetration of PEX piping in the U.S. market. We expect PEX to grow to 75% of the plumbing pipe market from its current 55%, similar to levels in other developed markets such as Australia.

While our no-moat and medium uncertainty ratings for Reliance remain unchanged, we revise our moat trend rating to negative, from our prior stable rating. Emerging competition in the PTC fittings category resulted in our revision. We acknowledge that Reliance’s brands, particularly the Sharkbite brand, will provide some level of market share protection against commoditisation. However, we view the introduction of competitor brand Tectite to The Home Depot’s PTC range as a pivotal moment in the commoditisation process, allowing alternative brands to gain acceptance in the market.