Company Overview: GWA Group Limited (ASX: GWA) is engaged in the design, manufacture and marketing of building fixtures, and fittings to residential and commercial premises. Its range of products includes sanitary ware and bathroom products such as baths, tapware, sinks and laundry tubs. The company distributes these products through several distribution channels in Australia, New Zealand, United Kingdom and China.

GWA Details

Decent Cash Flow Performance Despite the Pandemic: GWA Group Limited (ASX: GWA) manufactures and markets building fixtures and fittings to residential and commercial premises. The market capitalisation of the company as on 29 March 2021, stood at ~$763.52 million. The company owns and distribute market-leading brands and state-of-the-art product solutions across its range of product that includes sanitaryware, tapware, showers, basins, baths, kitchen sinks, etc. The products find application in an intelligent bathroom system by incorporating IoT smart water management solutions.

GWA reported resilient performance during H1FY21, and the results demonstrate efforts to save on costs and maintain margins, in a difficult period of operations. It reported a revenue of $197.2 million during the period. It was impacted due to the weaker construction conditions in Australia. However, it has reported decent sales performance in New Zealand and the United Kingdom region with an improvement of 3.1% and 5.7%, respectively, compared to the previous corresponding period when reported in their respective local currency. Moreover, there was growth in Q2FY21 compared to Q1FY21, which shows that there has been a recovery in builders' and merchants' sales in the Australia business in recent times. The reported NPAT stood at $18.5 million in H1FY21. The company has declared a fully franked interim dividend of 6 cents per share, which will be paid on 20 April 2021 with the record date of 16 March 2021.

H1FY21 Financial Performance (Source: Company Reports)

Decent Cash Flow Performance: There has been continuous improvement in the cash flow performance of the company, and it was able to achieve cash conversion of ~118% in H1FY21, despite the subdued market conditions. The company has made capital expenditures and has enhanced revenue generation capabilities for the future. Other investing includes $2.8 million in seed investment in third-party overseas venture. The free cash flow of the company increased to $28.1 million in H1FY21, compared to $12.9 million in H1FY20.

Cash Flow Performance in H1FY21 (Source: Company Reports)

Integration of Methven Driving Synergy Benefits: The company has delivered cost synergies of $1.5 million in H1FY21, as a result of its integration with Methven and expects to provide full-year benefits of $3 million in FY21. The company completed the acquisition of Methven on 10 April 2019, bringing in a high-quality shower IP business in its fold. The final stage of the integration of Methven is in process and includes consolidation of the New Zealand distribution network from two warehouses into one, and sale of the China plant, which is expected to be completed in Q3FY21. Methven’s shower IP finds its application in Caroma new shower products that were launched during H1FY21.

Improving Net Debt Position Despite Difficult Operating Conditions: The company has maintained a decent balance sheet with improvements in net debt to ~$125 million as of 31 December 2020, from a level of $144.8 million on 30 June 2020. There was an increase in debt during FY19 owing to the acquisition of Methven. The cash position of the company also improved to $42.3 million during the H1FY21 period end.

Top 10 Shareholders: The top 10 shareholders together form around 44.03% of the total shareholding, while the top 4 constitute the maximum holding. Mitsubishi UFJ Financial Group Inc and Vanguard Investments Australia Ltd. are holding a maximum stake in the company at 6.19% and 6.03%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company has been delivering consistent margin performance over the past three years, despite the impact of the pandemic and through other volatile periods. It has delivered decent ROE performance at an average return of 6.5% through H1FY19 to H1FY21. The cash cycle improved to 171.4 days in H1FY21 from 182.6 days in H1FY20.

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Risks: The company has operations and presence in different geographical markets and thus is prone to foreign currency risk. The presence of a considerable amount of receivables on the balance sheet also gives rise to credit risk for GWA. The management looks to mitigate this risk by putting a suitable credit policy in place and through proper credit assessment of its customers. Its variable rate borrowings are exposed to a risk of change in the profitability of the company, owing to changes in interest rates in Australia, New Zealand, and the United Kingdom. The Group is also exposed to business concentration risk as it had only four major customers comprising of ~85% of the trade receivables carrying amount as of 30 June 2020. Moreover, the impact of the COVID-19 pandemic has led to a shutdown of activities in its key markets and has resulted in delay or cancellation of projects for GWA.

Outlook: The company has maintained a disciplined approach despite the impact of the pandemic on its operations and will look to execute its growth strategy going forward. It expects to achieve $4 million of cost out in FY21 and deliver $3 million in synergies as a result of its integration with Methven. The company believes that it is well capitalised to drive future initiatives, with an improvement in the macro-environment. There has been improvement in the business sentiment and sales in Q2FY21 and the company anticipates increased traction in activities in residential-detached completions, renovation and replacement work in 4QFY21 through to FY22. GWA’s commercial order bank has witnessed a decent growth of ~16% y-o-y.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of GWA is trading below its average 52-weeks’ levels of $2.250 -$3.940. On a technical analysis front, the stock of GWA has a support level of ~$2.708 and a resistance level of ~$3.254. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium to its peer median P/E (NTM trading multiple), considering the decent cash flow performance and the synergy benefits from the acquisition of Methven. For the purpose, we have taken peers such as CSR Limited (ASX: CSR), James Hardie Industries PLC (ASX: JHX), Reliance Worldwide Corporation Ltd (ASX: RWC), to name a few, which comes under Industrials and Materials Space. Considering the current trading levels and expected upside in valuation, disciplined performance in H1FY21 with an improvement in cash flows and anticipated recovery in the economic environment, we recommend a ‘Buy’ rating on the stock at the current market price of $2.85, down by 1.385% as on 29 March 2021.

GWA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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