Reliance Worldwide Earnings: Sales Growth Softens on Faster-Than-Expected Cyclical Downturn

No-moat Reliance Worldwide’s RWC fiscal 2023 results disappointed. Despite this, we lift our fair value estimate by 4% to AUD 3.90 per share, mostly due to the time value of money. Minor changes to our earnings forecasts are broadly neutral to our intrinsic assessment. The shares sold off considerably after earnings and now trade at a level we consider fairly valued.

Fiscal 2023 sales of USD 1,244 million were 6% higher than last year but missed our forecast by 10%. This was largely due to softer-than-expected turnover in the Americas segment. Adjusted EBIT margin of 18% was in line with our expectation, but weaker sales saw EBIT come in at USD 222 million, 10% below our forecast. Adjusted net income of USD 156 million, or USD 0.20 per share, fell 4% on fiscal 2022, though it beat our target by 4% due to a lower-than-expected tax burden.

Following the soft result, we revise our near-term outlook for construction and repair and remodel activity. We had previously anticipated most of the cyclical downturn would materialize in fiscal 2024, but it is occurring sooner. With more of the weakness likely behind us, we now expect fiscal 2024 sales will fall 4.5%, broadly in line with management’s low-single-digit guidance and more modestly than our previous 6.5% decline forecast. We also assume EBIT margin will hold at 18% in fiscal 2024, up from our prior forecast of 17%, as we factor in less impact from operating deleverage.