Reliance Worldwide Corporation (ASX RWC) share price crashed 15% after the company reduced its FY 2019 EBITDA guidance.
RWC now expects FY 2019 EBITDA guidance to be in the range of A$260 million to A$270 million below the previous range of A$280 million to A$290 million.
About Reliance Worldwide Corporation (ASX RWC)
Reliance Worldwide Corporation is an Australia-based company that designs, manufactures and supplies water flow and control products and solutions for use in behind the wall plumbing.
Some of the popular brands include SharkBite, JG Speedfit, HoldRite, Reliance Valves, CashAcme, among others.
Source: Company website
FY2019 Trading Update
Reliance Worldwide’s Americas business segment continues to grow with underlying growth, however, the company has to face a couple of issues.
The first is the number of modest freeze events. A modest freeze event is considered to be the average level occurrence of winter storms over a sustained period across the USA causing cracked or broken pipes.
Reliance Worldwide’s business usually benefits from these freeze events occurring in the southern parts of the US rather than in the north-east or mid-west.
This is because water pipes are generally not as well insulated in the south meaning the freeze event can cause these pipes to break. RWC estimates the lack of a modest freeze event has reduced the net sales by about A$12 million to A$15 million.
The second reason is that the business continues to see strong sales by channel partners at the point of sale. A number of channel partners have pursued strategies to reduce inventory in the second half of the year.
In the EMEA segment, the company benefits from the full year inclusion of John guest business. The John guest business remains on track to achieve the net sales growth in the FY2019.
However, the core RWC businesses in the UK and Spain have not met expectations in the second half of the year. One of the prime reason is that the company’s decision to exit certain product lines.
APAC business segment has under-performed second half expectations primarily due to the sharper than forecast decline in the home construction in Australia. APAC is the smallest RWC operating segment accounting for about 13% of external net sales.
Management Outlook
RWC is positive in the long-term in spite of the near-term challenges. RWC remains a global leader in the brass and plastic to connect (PTC) fittings technology.
The management believes that there is currently low penetration of PTC, particularly in the US and the UK. This means there is still a very large market for the company to grow future sales.
Our Take Away
The company has to face some of the near-term challenges which are mentioned above.
At the current RWC share price, the PE ratio of Reliance Worldwide is 34.66, which suggests the company is overvalued.
Source: Investing.com
Considering its high PE, it may be prudent to wait for the stock to correct further before investing in this company at lower valuations.
